Tax Rules for Santa
Originally sent: December 17, 2007You have probably already booked your staff Christmas party for this year. If you haven’t, it is probably too late to get in anywhere. But what is the tax position on parties – and for that matter on presents to staff?
As most of us give at least some tax advice to clients we ought to be familiar with the tax rules on parties and presents, but there are some peculiarities in those rules. Look at them again very carefully to make sure your party will not cause you a big tax hangover in the New Year when you submit your P11Ds.
The Christmas Party
An annual event to which all staff are invited will not be a P11D expense provided the cost per head, including VAT, does not exceed £150.
Notice the rule says “per head”, not “per employee”.
The good news is that this means exactly what it says. If there are 10 employees and they all come to the Christmas party with a partner you could spend up to £3,000 without this becoming a taxable benefit. Or you could even invite clients to swell the numbers – as long as you did not feel that would spoil the party!
The bad news (for those of you who are VAT registered) is that you can only reclaim the VAT on the amount spent on members of staff, but not what is spent on their partners. In the above example, £1,500 of the total.
What might be even worse news is that it is the number who actually attend that is important. This could cause you a real tax headache if there are, for example, illnesses at the last minute and any of the cost is a fixed sum or there is a minimum charge.
Suppose, for example, you arranged a meal with a live band for entertainment. The meal cost £75 a head including wine and the band charged £750, all VAT inclusive. Twenty people were planning to attend, so the cost per head was going to be £113. Well within the £150 a head limit. As the time for the party approached, a bout of flu passed around the office. More and more employees had to give their apologies and miss the party. In the event, only fourteen people turn up. The cost per head is now £160.71. This means the entire amount is a taxable benefit for each member of staff who attends.
In this example you would save all that grief if you could get just one more person to attend, even if you dragged them in off the street. The cost per head would then drop to £150, which would mean nobody had to pay any tax. Perhaps this gives new meaning to Matthew 22:1-14, although I think the tax rules were slightly different in those days.
Note that all staff must be invited, even though they do not all have to attend. If you have a party for registered individuals to which the administrative staff are not invited this will be a P11D benefit regardless of the amount spent per head.
A final point on tax-free staff parties. There is no minimum limit on the number of staff your business must employ before you can take advantage of the rule. If you and your life partner are the only staff members, have a staff party (read “romantic meal for two”) on the business. Your tax inspector will probably not like this, but it is nevertheless perfectly legal. Make sure the business pays directly – otherwise the Revenue may succeed in disallowing it. And of course, keep strictly to the £150 per head rule too. Even in these days, though, and even if you live in London, that ought to get you a pretty decent romantic meal.
Christmas Gifts to Staff
Trivial gifts which are not rewards for employment, and not cash or exchangeable for cash, have traditionally been ignored by the Revenue. This has long been the case with items such as birthday cakes, or flowers for birthdays or illnesses. In December 2003 the taxman extended this to “trivial” presents, such as those you might choose to give your staff for Christmas.
The problem, here, is with the definition of “trivial”. Strict statutory treatment is that all such gifts are taxable. One reason for the “triviality” rule is that in practice it could be more expensive for the Revenue to chase tax on such gifts than the amount of additional tax raised. Perhaps another is that the Taxman does not really want to be thought of as Scrooge. But what is meant by “trivial”?
I have seen some articles on this subject refer to a £50 rule. But this is incorrect. That is the rule applying to “advertising” gifts to clients, and such gifts also cannot be food or alcohol. It is a rule covered by statute. The “triviality” rule is non-statutory and is very different.
In the HMRC manual, at EIM21863, the taxman says you can give a turkey, bottle of wine, or a box of chocolates and these will not be treated as P11D benefits. These are given as examples rather than being prescriptive. I am sure there was no deliberate intent by the Revenue to discriminate against your vegetarian, teetotal, diabetic employees. However, if you are giving anything else and are desperate for certainty you should perhaps check with your local tax office. Bear in mind, though, that once you do this, it is you rather than the turkey that will be stuffed if the local inspector decides what you are going to give is not trivial!
Finally, please do not give your staff their presents during the staff Christmas party, unless you are sure these presents will not bring the cost per head above the magical £150 limit. If you give them during the party they are not ignored under the triviality rule, but if you give them separately they are. Rather silly, I know, but we are talking about tax rules here!
May I take this opportunity, on behalf of Adviser Breakthrough Solution, of wishing you all a joyous Christmas, Hannukah, Eid-Ul-Adha, Dhanurmasam, Guru Gobind Singh Sahib Gurpurb, Zartusht-No-Diso, or Yule. If I have missed anybody here, apologies. May I also wish you an extremely prosperous and happy New Year.
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
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