As the festive season approaches, it is traditional for tax advisers to remind employers how to avoid leaving any tax-traps under the tree. By following a few simple rules, employers looking to offer a little extra to their employees over Christmas can make sure they avoid any unpleasant tax surprises in the New Year.

Christmas gifts 

Employers can make tax-free gifts to employees on occasions such as Christmas, birthdays or other celebrations by taking advantage of the trivial benefits rule. This provides a statutory exemption from income tax and national insurance for employees and employers provided that: 

• the cost of the gift, including VAT, does not exceed £50 per employee;
• the gift is not cash, or a cash voucher (a voucher which can be exchanged for cash);
• the gift is not provided under a salary sacrifice or other contractual arrangement; and
• the gift is not provided in recognition of any particular past or future services performed by the employee.

While these conditions are usually straightforward, there are a few points of detail employers should bear in mind. 

Firstly, this is an all or nothing exemption - if the cost of a gift exceeds £50 then the full value is taxable under the usual benefit in kind rules. If the benefit is provided to a group of employees and it is impractical to work out the exact cost per individual, then the gifts can still be counted as trivial, provided that the average cost comes in under the £50 limit.

Secondly, employers are not permitted to divide a larger gift into several smaller ones to try and keep within the individual gift limit. For example, providing a gift card of £30 would initially be exempt under the trivial benefit rules, but topping up the same card with £30 later on in the same tax year will take the total of the benefit over the £50 limit. At that point, both gifts will be treated as a single benefit which does not meet the trivial benefit conditions. The result is both the original gift and the top-up will become taxable.

Employers should also be careful of giving more than one gift for the same purpose. Taken separately, a bottle of wine at £30 and a voucher for £25 each fall under the £50 limit. However, if both are intended as Christmas gifts, then HMRC will consider the two gifts to be a single Christmas gift with a combined value of £55. This will then fall outside the trivial benefits rules and be taxable. 

Directors and office holders of close companies (companies owned and controlled by five or fewer participators, as is the case in many family companies) and employees related to them need to be extra careful as they are subject to a further restriction on trivial benefits. For these individuals, the aggregate value of any trivial benefits received in any tax year must not exceed a cap of £300.

The Christmas Party 

When inviting staff to any work event it is important to remember that such functions can potentially create a taxable benefit in kind. Since attendees are unlikely to appreciate a tax bill at the end of the night, it is important to ensure that a few conditions are met.

The basic conditions for a tax-free party are: 

• the party must be annual;
• it must be available to all employees; and
• the cost per head must not exceed £150.

Once again, there are a few points of detail employers need to be aware of, as follows. 

The annual test 

The requirement for the party to be annual means that the business could hold a regular summer function instead, or celebrate on another occasion. It doesn’t have to be held at Christmas. The key requirement is the event should recur. One-off celebrations, such as a party to mark an anniversary to celebrate 20 years of trading, do not qualify for this specific exemption. 

The all-employees test 

The all-employee rule is modified if the employer has multiple sites and can be applied on a site by site basis - but it must be available to everyone at that location. Smaller parties grouped in other ways – such as by department – can be held if preferred, as long as all staff at that site have the opportunity to attend one of the events. 

If the event is only for selected staff so that the general exemption does not apply, then it might be worth considering if the trivial benefits rules above might apply where the average cost is under £50 per head.

The cost test 

To establish if you are within the £150 per head limit you need to consider the total cost of providing:

• the party or function;
• any transport or accommodation provided for those attending (including non-employees); and
• any related VAT on the above.

This total then needs to be divided by the number of people attending to get the cost per head. Any non-employees, such as spouses or partners of employees, who attend can be included in the headcount.

The £150 is an exemption, not an allowance, and if it is exceeded, then the whole cost is taxable. If the cost is £150.01 per head or more, then the event will be a taxable benefit in kind for all staff who attend.

Where the cost exceeds £150, this creates a lot of administration. The benefit must be calculated and reported for all attending employees, so that tax can be collected from them under PAYE - and their taxable benefit must also include the cost of any spouse/partner in attendance who is not an employee in their own right. The employer must also pay Class 1A NICs on the total benefit amount following the end of the tax year. Alternatively, the employer can bear all of the tax and NIC themselves by including the benefit in a PAYE Settlement Agreement.   

Multiple events 

Where an employer holds more than one annual event, for example a Christmas party and a summer function, it is possible for all of them to be exempt provided that when the cost per head of each event in the tax year is added together, the total is less than £150.

For example, a summer event of £50 per head followed by a Christmas party costing £75 per head can both be exempt as, added together, the £150 limit is not exceeded.

If the employer also holds an annual event of £45 a head in the autumn, then the three events combined in the tax year would be over the limit at £170. In this case the employer is permitted to allocate the exemption to the Christmas and summer party, and only the autumn event would be taxable. 

For any events not covered by the £150 exemption, consideration should be given to whether the trivial benefit rules might apply or if the benefit could be included in a PAYE Settlement Agreement.   

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.  

We regularly publish articles on a range of tax and wider topical issues which affect employers. If you wish to subscribe to our monthly Employer Focus e-newsletter, please contact us.