Christmas is rapidly approaching and many businesses will be organising Christmas parties and thinking about Christmas gifts. Companies can be very generous at this time of year and spend hundreds or thousands of pounds on employees. Now is the time to consider the tax implications and understand what HMRC will and won’t allow.

Christmas is a good opportunity to reward staff for their hard work and to celebrate as another year of business draws to a close. Employees will be looking forward to a deserved break and employers will be considering what gifts to distribute to the staff.

Christmas parties

Christmas parties have a tax exemption allowance of £150 including VAT per employee. The amount is only applicable to annual parties and you cannot combine several separate functions through the year into your calculations. If you exceed the £150 per person limit then the entire amount (not just the spend over £150) becomes a benefit that must be reported on the employees P11D.

Main points to consider

  • The £150 exemption includes VAT
  • All costs paid for by the business must be included in the total figure including taxis or travel to and from the party, drinks and accommodation
  • Additional guests (family members or clients) costs must also be included in the calculation
  • If you spend more than £150 per person the entire amount is a ‘benefit’ and must be declared on the P11D and tax will be due.

Christmas gifts

Many companies choose to pay staff a ‘Christmas bonus’. All cash payments, shopping vouchers or bonuses included on payslips are liable to tax. Whilst it may be a gift it still forms part of the employee’s taxable earnings. Small gifts are deemed to be ‘trivial’ by HMRC and are not subject to tax.

HMRC do not provide information on what value of gift is ‘trivial’ but they state that a “seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas” is suitable. They do not declare a value and suggest that employers are objective in their judgements. In simple terms, if you spend more than the value of a decent size turkey you may need to declare this as a benefit in kind to the employee.

Reclaiming VAT

The company can reclaim the VAT spent on a Christmas party for employees. However, you cannot reclaim VAT on other entertainment. If you invite employees family members or customers to the Christmas party you cannot reclaim VAT on that portion of the expense.

It may be a time of goodwill, generosity and giving, but HMRC does not allow this generosity to go untaxed. If you want to keep things simple arrange for one Christmas party for staff only. Keep the cost under control and give the staff a single bottle of ordinary wine as a gift. Go beyond this and make sure you account for the tax correctly.

We hope that this article has not sucked the spirit out of Christmas. If your company is planning a Christmas party we wish you all a great time.

Please note that this information is provided as a guide only. It does not constitute advice. SFS always recommend that you contact an accountant for tax advice.