Christmas is a time of bonhomie and generosity, manifesting in the workplace through the renowned tradition of employee gift-giving and the office Christmas do. But without sounding like Scrooge at Fezziwig's party, these activities are still part and parcel of business, subject to tax terms just like any more sober staffing issue.
So as a small business owner, how can you navigate the holidays while staying on the 'nice' list at the HMRC? Riz Wasti from 2E Accountants looks at some of the main tax challenges presented by the most wonderful time of the year, and how to handle them without getting singed.
1. The Office Party
Happily, there is a tax exemption for employee entertaining. But before you deck the halls with abandon, take note: the HMRC stipulates that this relief applies only to one or more annual parties available to all employees, where the total cost of said parties does not exceed £150 per head (for all attendees – including clients and guests of employees). It's worth sticking closely to the Christmas party budget, then, for going over this amount by even a fiver makes the whole cost of the event taxable as a benefit in kind.
Making too merry? If you've exceeded £150 per head, the amount exceeded must be reported as a benefit on the employee's P11D. Conversely, you as the employer may pay the tax as a PAYE settlement agreement (PSA), and pay Income Tax and National Insurance contributions on behalf of your employees. Neither is a welcome option if you intended to stay within the exemption, so when working out the budget of the event, take everything into account – including taxis home – to avoid getting burned by unexpected taxes.
2. Christmas Cards and gifts to/from third-party
Christmas cards to clients and prospects are considered an office expense and are deductible, provided that the cards carry a clear advertisement for your company. So be sure to take advantage of this cheerful way to remind clients and customers of your business offers, and sail into the New Year on a tide of goodwill.
Christmas wouldn't be complete without the bottle of Dom Perignon from the client with whom you've had an exceptionally good year, or the box of truffles from the prospective client looking forward to a productive new relationship. It's common for your employees to receive Christmas or birthday gifts from business contacts. Happily, any small client gift, promotional or otherwise, if under £50 in value is tax-exempt for you or your employees. Anything over will need to be reported on employee’s P11D and tax paid. Christmas gifts from you to clients are classed as 'entertaining', and aren't tax deductible for corporation tax purpose.
3. The Christmas Bonus
The practice around giving bonuses varies wildly from business to business, and often from year to year within the same company – depending on economy and performance. While it's up to you to decide how best to hand out this tricky treat, as far as the tax man goes, the procedure remains the same. The Christmas gift in the form of the monetary bonus is taxable like all other earnings. Just put it through as per your usual PAYE system. The voucher, another popular option, is handled the similar way – an employee must pay tax on its full value.
Small tokens like gift baskets and bottles of wine, on the other hand, are unlikely to be taxable within a reasonable cost bracket. If the value of a gift is more than £50, you had best report it as a benefit on the employee's P11D, or pay the tax as a PAYE settlement agreement (PSA) as above. Follow the above, and you should keep on the sweet side of both the HMRC and your hardworking employees, as well as keeping the Christmas spirit. Finally, always check with your advisor or HMRC for your specific needs as rules can change every year.