Summary

In this episode we will discussing the tax efficient ways to reward your employees and customers in the festive period. Not forgetting pointers for the all-important Christmas party. Enjoy.

Natasha  00:37

Hello, and welcome to episode two of Tax Able with Natasha Heron. Today’s episode is how to Crack the Christmas Tax Code. Christmas is right around the corner, so it’s about the time that you’ll be looking to reward your customers, your staff, and maybe even give yourself a little bit of a treat in the festive period, there are many options available, but they’re not always tax efficient.

Natasha 01:00

If you give a gift from the kindness of your heart, what you want to avoid is finding out that you’ve got an unexpected and unwanted tax bill. 2021 has been a hard year for everyone. We started the year off with another national lockdown and we’re approaching the end of the year and Coronavirus is still lingering.

Natasha 01:19

There are a lot of rules in this area, and it is quite complicated, so I’ve broken it down into separate sections, so hopefully it will be easier to digest.

Natasha 01:28

Let’s dive right in section one. Your employees. This means people on your payroll. It does not mean your subcontractors and we’re also ignoring directors. Directors. I will cover you later in the podcast. It’s just there’s a few extra funky rules that you need to remember. What can you do to reward your hard working employees and let them know that you’re thankful for everything they’ve done for you this year. First of all, you could give them a Christmas bonus. Everyone loves a Christmas bonus, helps them buy presents and get you through January.

Natasha 01:59

If you give cash or vouchers exchangeable for cash, it will go through salary as normal. Your employees will have tax deducted, National Insurance, pension contributions and anything they usually have in their monthly salary. An alternative option is to give them vouchers exchangeable for goods or services.

This is just a fancy way of saying Selfridges vouchers or vouchers that they can use for a meal or in exchange for theatre tickets. Now, if you do this, technically, they need to be reported on a P11D.

Natasha 02:31

If you haven’t heard what P11D is. It’s an annual form completed for each employee, and it lists all the work related benefits that they receive. You may be thinking it’s ridiculous. You’ve done something nice. You’ve gone out, you’ve got these vouchers and you’ve given it to your staff. Why should you have to put it on an P11D? And why should they have to pay tax? Because you’ve given them a voucher? I agree. Doesn’t seem fair. So to avoid this from happening.

You as the employer will have to opt for a special arrangement with HMRC and it’s called a PAYE Settlement Agreement. I’m going to touch on that later in the podcast but be aware that there is that arrangement there.I will go through this in more detail towards the end of the podcast.

Natasha 03:15

Your third option is to give your employees gifts and by gifts it could be hampers, bottles of wine, chocolates, flowers, anything you can think of, they can receive it as a gift. Gifts are split into two sections, trivial and non-trivial. As you can guess, non-trivial means there’s going to be some tax consequences.

Tax going to be charged to your employee on that gift. They have to be reported on that pesky P11D again. So to avoid that from happening, you’ll have to opt in for that special agreement with HMRC that I spoke about a moment ago.

Natasha 03:50

Trivial gifts these are the ones you want to go for. There’s no tax consequences for the employee or the employer when you give a trivial gift. So how do you make sure that your gifts are classed as trivial? Well, there are certain conditions that need to be met and we’ll go through them now.

Firstly, the gift is not a cash or a cash voucher. Absolutely fine. We’ve covered that already. Secondly, the cost of the gift does not exceed £50, including VAT. That’s very important per employee. Thirdly, the gift is not given as part of a salary sacrifice or any other arrangement. Fourth, and most importantly, is that the gift is not given in recognition of an employee’s past or future performance. For example, for a gift to be trivial, it cannot be as a reward for hitting a target or for staying late for doing anything related to their employment. Say, for example, giving a gift because it’s Christmas and documenting that this is the reason that you’re giving this gift will meet the definition.

Natasha 04:56

There is no limit on the number of trivial gifts that can be made to each employee during the year and you can recover all of the VAT. Even better. Trivial benefits are deductible for Corporation Tax and Income Tax purposes. If you do not know what I mean by deductible, please refer to my Instagram, which explains this term.

Natasha 05:18

Section two, the Big Shindig, The Big Office Christmas party. I’m sure we all have photos from previous Christmas parties that we’d rather forget. Maybe perhaps we had one or two bottles of wine too much, but they’re usually a lot of fun. What you want is to be able to have your Christmas party and for there to be no tax implications on the employee and you as the employer to do this, the party needs to meet certain conditions, so we’ll go through those now. It needs to be an annual party, not a one off event. So Christmas party will meet this definition. It needs to be open to all employees or all employees based in one location. If you’ve got different offices in two separate areas, let’s say London and Manchester, you can have a Manchester Christmas party and a London Christmas party. That’s fine.

Natasha 06:09

Thirdly, the cost does not exceed £150 per head and that’s including VAT. This is a limit, not an allowance. Please do not confuse it. Many people get this wrong. If you go even one Penny over £150 per person, the whole amount of that Christmas party is then taxable on the employee and the employer. You do not want to do that, especially if you’ve only just gone over the limits and make sure you plan ahead.

You’ll be happy to know that HMRC have confirmed that virtual Christmas parties are eligible for this relief. So if you decide that you don’t want to take the risk, your employees can benefit from that £150 limit if you decide to host the party over Zoom or there are other providers available instead.

Natasha 06:58

Please remember, though, when you’re calculating the cost of £150 ahead, this includes the whole cost of the event and by this I mean it includes food, entertainment, drink, potentially late night casino, visit taxis, home, maybe a cheeky kebab shop visit, overnight accommodation. Anything related to the party that the employer is paying for it all gets lumped together and divided by the number of heads that attended the party. That doesn’t mean just your employees. So if you are a very generous employer and your staff are allowed to bring guests, the whole cost is divided by the total number of attendees.

Natasha 07:40

Now what about if you managed to get in a summer party this year? I do have some bad news for you. The £150 limit is not per event, it’s per annum. So if you have multiple events, there still won’t be any tax implications on the employee or you as the employer. If the combined cost of all of those annual events does not exceed the limit, if you’ve already used up that £150 exemption on, say, the summer party or the summer barbecue, then the Christmas party would be taxable.

Natasha 08:11

Let’s turn to how we can stop these events and these gifts and these benefits being taxable on the employee. The way you do this is through opting and applying for a PAYE Settlement Agreement. This means that you the employer, agree to pay the grossed up amount on behalf of your employees, so you bear the cost. This just means that the employees get all of the benefit that you originally intended them to have and they don’t pay any tax down the line. So that’s the bad news over the good news is staff entertaining is a tax deductible cost. Remember, if you do not know what I mean by deductible, please refer to the post on Instagram. It is deductible for Corporation Tax and Income Tax purposes, and that’s the whole cost of the party, which is great, great news.

Natasha 09:00

But what about VAT? If you’re VAT registered, you will know that this is a very complicated tax, so as usual, it has its own conditions. VAT is recoverable on staff events but the definition for employees for that purposes is not the same as it was earlier. So if you were a very generous employer and you allowed your employees to bring partners and other guests, yes, it’s deductible for a Corporation Tax and an Income Tax purposes, but it’s not allowable for VAT purposes.

What you’ll have to do is you’ll look at the costs associated to partners, spouses and former employees and any customers, and you’ll be able to recover the VAT associated to employees, but you will not be able to recover the balance.

Natasha 09:47

Section Three – Directors. If you are self-employed or part of a partnership, please ignore this section. It is not relevant to you because you do not have directors as part of your business. If you’re a company, this is relevant to you because you do have directors. So please listen. The rules are dependent on whether the company is defined as close or not. So what do I mean by close? It’s a company that is controlled or owned by five or fewer people. So you have a close company. What does it matter? There are two points that I’d like to raise. The first one is directors may receive trivial gifts instead of there being an unlimited amount. They may receive. It’s capped at £300 per annum per director. So it’s not all bad news.

Natasha 10:30

Secondly, Christmas party. You can still have a Christmas party. The same £150 limit applies. If your business consists only of directors, you may not have any employees, then the cost of the Christmas party for the directors in this situation is deductible for Corporation Tax purposes, which is fantastic.

If you are a closed company, the directors have the same treatment as employees when it comes to the benefits. But if the event is provided only for the directors (and you have employees) it is not deductible for Corporation Tax purposes because the event needs to be open to all employees, and that is the difference between the two definitions, and you need to make sure you get the distinction correct.

Natasha 11:15

Section Four –  Gifts for Your Clients. Christmas is a great time to let your clients know that you’re thinking of them and you want to thank them for all of the business they’ve given you that year. Depending on what your business is, you may be able to benefit more than others because you can give business samples without any tax implications.

If you are a company that makes wine, then you can give your customers wine without any tax implications. But if that is not your business, you need to be aware of the rules surrounding the gift that you can give.

If the gift carries a clear advertisement for your business and by this I mean it’s branded up. The company logo is on it and it needs to be on the gift itself, not just the wrapping, because HMRC are wise to that, then the cost is deductible because it’s treated as a marketing cost.

Natasha 12:05

However, if the gift costs more than £50, is alcohol, food, drink, tobacco or vouchers, then the cost is not deductible for tax purposes. Even if the Christmas chocolates given have your branding all over them. If that is not your business, it counts as food and it is not deductible.

Natasha 12:28

So you’re giving your clients a gift. Either it’d be tax deductible or it won’t. What do you do with VAT has been charged, as always, beat has its own set of, in my opinion, unnecessary complicated rules. The easy part is you can recover the value of the gift if it does not exceed £50. However, this limit is applied on a rolling twelve month period. So good luck to your Finance Department because they’re going to need to keep a record of all of the gifts you’ve given to each of your customers to make sure this limit is not breached.

Natasha 13:01

So now we’ve come to the finale. Gifts from third parties to your employees. Good news is your employees can receive gifts. It’s great when your customers want to reward your employees for all the hard work they’ve done and the employee will not be subject to any tax implications as long as the gift does not exceed £250 in cost. If the cost does exceed £250, the employees are going to pay tax on it.

Natasha 13:26

I appreciate I’ve given you a lot of information to digest as this is a really complicated area and you’re not expected to know all of the rules. You just need to have an awareness.

If you would like more information on this topic, you can either contact me directly at help@taxable.uk or you can head over to the Hillier Hopkins LLP website, the sponsors of this podcast who have fliers available for you with more information on what items are and are not tax deductible.

Natasha 13:55

Thank you for everyone for tuning in today. I appreciate each and every one of you for listening. I hope this has started your week off well and I’ve got you thinking about what you may or may not do for your employees and for yourself. I hope you have a wonderful week. We are on the countdown down to Christmas. We are getting ready for that Christmas break. We are going to see our families, which is fantastic. Hopefully we will not be in another lockdown. So 2021 Christmas is going to be significantly better than 2020.

Natasha 14:23

Please do make sure you tune in for next week’s episode which is called HMRC The Elusive Beast. I’m going to be breaking down; who HMRC are, what powers they have, what guidance they provided aid and how the tax system works and why it is relevant for you.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Please visit my disclaimers page for full details. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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