As the holiday season approaches, employers may be considering making gifts to employees and/or having parties.
A gift that meets the trivial benefits conditions can boost morale and has tax advantages for both the employer and employee as qualifying gifts do not suffer income tax or national insurance and the cost is tax deductible for the employer.
To be exempt from income tax and national insurance, the gift must meet the following criteria:
- the VAT inclusive cost is £50 or less
- it is not cash or a voucher redeemable for cash
- it is neither a contractual obligation nor part of a salary sacrifice arrangement
- it is not provided in recognition of work performed
If any of the above criteria are not met, the cost of the gift will be a taxable benefit in kind reportable on form P11D or via a PAYE Settlement Agreement (PSA). There is no limit on how many trivial benefits can be provided to an employee, although the total spend on a director of a close company is capped at £300 per tax year.
The following are examples of trivial benefits an employer could provide this festive season:
- Gift cards
- Christmas hampers/chocolates/alcohol
- Business-branded merchandise
For VAT purposes, the rules affecting business gifts of goods apply so that output tax will need to be accounted for to HMRC if the VAT exclusive cost of a gift made in any 12 month period exceeds £50.
Social Functions and Christmas Parties
Social events can give employees a chance to relax and bond with colleagues. To qualify as exempt from income tax, the party or social function must be open to all employees, be annual (such as a Christmas party) and the VAT inclusive cost in the tax year is less than £150 per attendee.
The VAT inclusive cost of £150 applies for the tax year and not per event. As a result, if an employer decides to hold multiple annual events in the tax year, the events will need to be budgeted and reviewed to determine if the threshold has been exceeded and if so, a benefit in kind will need to be reported.
For VAT purposes, VAT incurred on employees is recoverable for a fully taxable business.
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