What Christmas gifts & Entertaining can I save Tax on?
Posted on 7th Mar 2023
In the run up to Christmas many business owners like to treat their staff or give a little something to people who have helped them and their business during the year.
Invariably that means giving gifts or doing a bit of entertaining.
What most business owners don’t know is what tax relief they can and can’t claim for on gifts and entertaining.
As a result, not everything that could be claimed for is….and the business ends up paying more tax.
So that you don’t miss out on possible tax savings this article summarises what are tax relief is available on gifts and entertaining.
Let’s get started saving tax….
Entertaining customers, strategic partners or another third party is a business cost which can be paid by the business.
When it comes to tax the general rule is that all entertaining is NOT tax-deductible NOR can any VAT be reclaimed.
There is, however, one exception to this rule – staff entertaining.
2 Staff Entertaining
Lots of businesses like to have a Christmas Party for their employees. That said the rules are not actually restricted to the Christmas Party. They apply to any other events that the business puts on for its’ employees during the year.
What are the tax benefits?
The good news is that the Christmas Party (or any other employee event) is treated as staff entertaining. This means the cost of the event can be claimed as a business cost.
And when it comes to tax….
- The cost is fully tax deductible – which reduces the annual tax bill
- The VAT on any of the costs is fully reclaimable – which reduces the next VAT bill.
What costs can be claimed?
All the costs associated with the employee event can potentially be reclaimed.
Those costs will typically be the cost of event itself, the food and the drink.
That said if there are any other costs associated with the event, eg the taxi home or hotel overnight stay can also be claimed.
The total of these costs is potentially fully tax deductible AND any VAT is reclaimable too.
The Qualfiying conditions
In order for staff entertaining costs to qualify as being tax deductible and VAT reclaimable then there 3 conditions which MUST be met.
- The event MUST be an annual party OR social function
- ALL employees are invited
- The annual cost per head of ALL events in the year is less than £150 (including vat)
There is nothing stopping the business holding multiple events during the year. Just remember all 3 conditions must be met and the total cost of ALL the events in the year is less than £150 (including vat) per head.
IF the £150 annual amount is exceeded THEN the whole of the cost spent is disallowed. It is NOT the excess over £150!
3 Gifts to non-employees
Gifts to customers, strategic partners or other third parties are a business cost which can be paid by the business.
When it comes to tax the general rule is that the amount spent on those gifts is not tax deductible.
That means the business does not reduce its tax bill by buying those gifts. The reason for that is that those gifts are treated by the taxman as entertaining.
There is, however, one exception to this rule – advertising.
By qualifying as an advertising cost a gift becomes tax deductible as opposed to entertaining which isn’t tax deductible.
To qualify as an advertising cost a gift must meet ALL of the following 4 criteria.
- Must be a business gift, eg. business diary, calendar, notepad, etc
- Must not be food, alcohol, tobacco or vouchers exchangeable for these items.
- Must carry a conspicuous advertisement for your business (eg company logo)
- Must cost no more than £50 (including the VAT).
4 Trivial Gifts
Every director (& company secretary) can receive up to £300 of trivial gifts from their limited company each year.
For a gift to qualify the following 3 conditions must be met.
- It must be considered a gift
- Each gift must cost a maximum of £50
- The gift cannot be cash or a cash voucher
ALSO. Any family member (of a director) who is on the payroll of the same limited company can ALSO get £300 of trivial gifts each year!
The cost of all trivial gifts is tax deductible for the employer and tax-free for the employee.
5 Employee Gifts
Gifts from your business
You might want to give your employees a present this Christmas.
HMRC manual says that an employer may provide employees with a seasonal gift, eg, a turkey, an ordinary bottle of wine or a box of chocolates.
As long as the gift is not cash AND costs less than £50 per person a head then it shouldn’t be treated as a taxable benefit.
If the gift extends beyond one of the items mentioned above, eg, from a turkey to a Christmas hamper, then you’ll need to consider the contents and cost before being able to determine whether the benefit is trivial.
The cost of all these gifts is tax deductible for the employer and tax-free for the employee.
BUT. IF the gift exceeds £50 then it will need to be reported to HMRC and will be taxable under the normal Benefit in Kind rules
Gifts from third parties
Employees are allowed to receive gifts from third parties (eg suppliers, strategic partners, customers, etc) as a result of their employment.
IF the gift is not more than £250 in cost then it should not be taxable for the employee.
6 Encouragement Award to Employees
These awards can be given to an employee as a thank you for special efforts.
The cost of an encouragement award is capped at £25.
The cost though is BOTH a tax-deductible cost for the business AND tax-free for the employee.
It is important, now more than ever, to claim all he tax reliefs that you’re entitled to as this will save you tax.
If you’re unsure what you can claim when it comes to gifts and entertaining then ask your accountant – a good accountant will be able to give you insights and help to minimise your tax.
If you know a fellow business owner who has staff and is worried that they’re paying more tax than they should then please share this article ASAP – it may save them a lot of cash.
This article is for general information only and no action should be taken, or refrained from, as a result of this information. Professional advice should be taken based on specific circumstances in each individual case. Tax rates do change over time. Whilst we endeavour to ensure that the information contained in the article is correct, no liability will be accepted by KMA Accountancy or Krystal Clear Accountancy, both of which, are trading names of Kim Marlor Associates Ltd or damages of any kind arising from the contents of this communication, or for any action or decision taken as a result of using any such information.