Christmas is coming and every year we are asked the same questions about gifts to customers and staff. As far as HMRC is concerned there’s nothing special about Christmas! The usual direct tax and VAT rules apply to gifts. We have put together this fact sheet to outline the implications of Christmas gifts and parties.
Business gifts to customers are only allowable as a tax deduction if the total cost to one individual per year is less than £50. The gift must bear a conspicuous advert for the business and it isn’t food, drink, tobacco (unless they’re samples of your products) or exchangeable vouchers.
The VAT position for gifts to customers, suppliers etc. is identical to that for gifts to employees. So you must account for VAT if the gift alone, or series of gifts together, have a value of more than £50.
HMRC will consider a benefit exempt on the grounds that the cash equivalent of the benefit taxable on the employee is so trivial as to be not worth pursuing. HMRC has conceded a seasonal gift such as a turkey, bottle of wine or box of chocolates can be exempt.
Vouchers: these are subject to tax and National Insurance.
The cost of this is an allowable tax deduction for businesses. This doesn’t however apply to sole traders or business partners of unincorporated organisations.
HMRC will allow you to spend up to £150 per employee on a Christmas (or other) party. The £150 is a VAT inclusive figure (£125 + VAT).
The party can be at any time of the year. It can be split over more than one event, as long as the total spend per employee is not more than £150. Beware – if you go even a small amount over the £150 limit, then the entire amount would be disallowed – not just the excess over £150! Also, the event must be open to all staff (or all staff in that location if you have more than one location).
What about non employees?
If employees’ husbands/wives/partners go to the party, the expenditure will be allowed for tax. As long as the total expenditure for the party, including guests, amounts to no more than £150 per employee attending.
When making your claim for input VAT however, you should bear in mind that Customs & Excise view the expenditure on persons who are not employees to be entertainment and as such, you cannot claim the VAT on that proportion of the expenditure. In such cases, you will need to split the bill according to how many people are employees and how many are guests.
In the context of your one man company, there is nothing to stop you taking out the company secretary for an “office party for two.” Just remember to keep the cost down to £150 per employee. That’s £300 for the two of you.
Client entertaining is never an allowable deduction for business tax purposes and input VAT cannot be recovered on it.
If you require any further advice on the guidelines for Tax and VAT and Christmas, then please get in touch with our friendly team