Now that the festive season is a mere blur in our collective rear-view mirrors, I thought that I would explore the various freebies, tax perks and allowances that many in business associate with Christmas. The questions of what is and what is not allowable has come to my attention once more, with HMRC recently sending out nudge letters to employers.
These letters remind employers to be careful over their recordkeeping obligations with regard to any generosity they’ve shown to employees and customers, both in the lead up to Christmas and throughout the year. The nudge letters are effectively reminders to employers, of the concessions available and their recordkeeping obligations.
Tax Freebies: Parties for employees
Although most employers and their employees think ‘Christmas party‘, in reality the legislation covering this concession only mentions ‘annual parties and functions”, therefore the rules do not just apply at Christmas but could be a mixture of a summer function and a Christmas party, including virtual parties via Zoom.
The reason why many employers fall foul of this concession is because they mistakenly believe that the £150.00 is an allowance that they can claim, even if the annual cost per head exceeds this amount, wrong! Even if the £150 is exceeded by a single £1, the whole amount is taxable. In my opinion this is very petty by HMRC, especially as the £150 limit has not been increased since it was introduced, over 20 years ago!
It is therefore important to keep good records to show HMRC when they do one of their periodic PAYE audits. These records should also show which of the individuals being claimed for are the spouses or partners of employees. This is because, whilst the cost of entertaining employees is regarded as an allowable expense against corporation tax, it does not apply to spouses or partners.
Tax Freebies: Gifts to employees
If an employer decides to be extra generous and give his/her employees £40 in cash to buy a turkey and all the trimmings, HMRC consider this a form of remuneration and tax is payable via their P11D, however, if the employer gives the employee a £40 voucher that is exchangeable for groceries, this is different. The key point under the trivial benefit exemption is cash (or vouchers that can be converted to cash) is taxable, whereas vouchers that can only be redeemed for goods are not.
This exemption allows employers to give employees gifts and non-cash vouchers up to the value of £50 on each occasion, exempt from any income tax, NIC and there is no obligation to report this to HMRC, but records must be kept. Also, multiple gifts of this type can be given throughout the year as long as each gift does not exceed £50.
There are, of course, qualifying conditions for the gift/non-cash voucher to prevent abuse, such as they’re not available for spouse/partners and if there is a regular pattern, say a £50 every month, HMRC could and probably would, consider this disguised remuneration.
Tax Freebies: Gifts to and from customers
Employees can also receive gifts from third parties as well as their employer. This could be as little as a desk diary worth £10 or as much as a i-pad worth £250. The same rules as the trivial benefits exemption are applied (not cash, not a reward and so on), as long as the cost of provision does not exceed £250.
The same rules will of course apply to you if you’re an employer giving a gift to a third-party employee who has provided you with ’above and beyond’ excellent service. But remember, you must keep records of any such gifts, including the name of the recipient.
This concession was also brought in from 2003 and is known as a “small gift”. That’s £250 as a gift or gifts over the course of the tax year. If the gift or gifts are over £250, this takes us into reporting via the taxed award scheme rules. These are similar to those for employees via the P11D.
Tax Freebies: Third-party entertainment
The 2003 legislation covering gifts, parties, etcetera, refers to third-party entertainment as not the same as giving a gift as above and applies to the full tax year. It also states that there is no income tax or NIC reporting or recording liability for ‘hospitality of any kind’ for the recipients.
In HMRC’s compliance manual, they interpret hospitality as covering any form of hospitality (dinners, parties, hospitality tents at sporting events and so on) events such as tickets to the theatre or sporting events, such as the FA cup Final. But do not forget, if you’re providing the entertainment to others, you must keep records, but do not have to report it.
Tax Accountant’s view
I have covered the subject of tax freebies and other allowances many times over the years, most recently on December 8th 2022 (‘Christmas Employee Perks’). Today’s Blog is essentially a comprehensive review of the subject and unless there are any significant changes to the law or employers’ reporting obligations, to quote Porky Pig from Bugs Bunny, “That’s all, folks!” on this subject for the foreseeable future.