With the festive TV adverts appearing on our screens, thoughts inevitably turn to staff Christmas parties and gifts. In this this article we look at the often misunderstood tax and VAT consequences of functions and staff gifts.
In general, the cost of business entertainment, e.g. treating a client to lunch or tickets to a football match, is not deductible for tax purposes. However, there is an exception for staff entertainment.
The cost of entertaining staff will be fully deductible for corporation tax purposes, as long as it is not merely a small part of the cost of entertaining non-staff. For example, if a company holds a lavish ball for 100 clients, and invites a few key staff along, the staff entertainment is merely incidental to the excluded business entertainment and the cost won’t generally be allowable. The crux is to ask ‘What is the main motive for incurring the expenditure?’. As long as the (honest) answer is to entertain staff, there is no problem.
There is no upper limit to what a company can claim for staff entertainment. This sometimes raises eyebrows, as some people will swear that they ‘know’ there is a £150 per head limit. But, this applies for income tax purposes from the perspective of each individual employees.
Where people, including business owners, sometimes mix things up is the £150 exemption for benefit-in-kind purposes. It would slightly defeat the objective for employees to be invited out for a Christmas party with their employer, only to be told that they owe tax on it later on. To avoid this, there is an exemption as long as the cost per head does not exceed £150 (including VAT) each year. But again, there can be confusion as to how this operates.
Firstly, it is important to note that it is not an allowance. A company cannot spend £160 per head and deduct £150 from the employees’ taxable benefit in kind. If the per-head cost exceeds £150, it is all subject to income tax and Class 1A NIC.
Secondly, many owners are aware that the exemption can be spread across more than one event during the year. However, it is crucial to understand that these have to be annual events, e.g. Christmas parties, a summer ball, etc. It can’t be used for things like occasional drinks, or lunches. It is also sometimes incorrectly believed that the expenditure toward the limit is added on a cumulative basis. It is not, and the exemption can be used against whichever qualifying event suits best. For example, if a summer ball is held at a cost of £80ph, and a Christmas party is held at £125ph, the exemption can be claimed against the later event.
Thirdly, the event(s) in question must be open to all staff. It cannot just be for directors, managers, etc. However, it is permissible to restrict attendees by location, for example where there are multiple branches of a business, it is fine to hold separate branch-specific functions.
There can be a problem where a company is required to pay upfront. The £150ph limit applies to attendees, not invitees. So, if a number of staff are taken ill or do not attend for any reason, the average cost can increase.
Note that employees can bring guests and they will be included in the head count when checking if the £150ph has been exceeded.
If the limit is exceeded the employer has the ability to enter into a PAYE Settlement Agreement (PSA), whereby they agree to pick up the tax and NIC costs, but these do have specific compliance requirements and can in practice prove costly.
The position for reclaiming input tax is slightly different.
Generally, no input tax can be claimed on business entertainment costs, but there is an exclusion from this block, for employee entertainment. Recovery will be allowed in full, in respect of the cost of entertaining staff, including the directors, as long as all staff are entitled to attend. Unlike for income tax, there is no upper limit.
However, there is a different catch to consider with VAT. If there are non-staff guests attending, the company has to apportion the input tax between staff and non-staff attendees. So, if there are 30 staff and they each bring a partner, etc. that is not an employee, only half of the input tax will be recoverable.
This problem can be alleviated by making a token charge to the non-staff attendees. For example, if the true cost is £60ph, then making a charge of £10 for non-staff attendees means recovery will no longer be blocked, as the company is no longer providing the entertainment free, it is making a supply. It would account for output tax of £2ph but then claim £10ph as input tax (i.e. £60 × 1/6). It is important that this is a genuine charge, it cannot be a suggested amount or a donation – it has to be compulsory and collected and accounted for.
Many companies will also make gifts to employees at Christmas time. In practice, there is no issue claiming a deduction for corporation tax purposes, but the income tax and VAT consequences must be considered.
If the value of the gift is no more than £50 (or £50ph on average, if it is provided to a group of employees), and it is not money or money’s worth (e.g. a cash voucher), it will probably qualify as a trivial benefit, so the company won’t need to report it, as long as it is not provided for in the employment contract and is not performance related. In short, it has to be a genuine non-cash gift.
For VAT purposes, the problem is that the company has made a taxable supply to the employee, and so will need to account for output tax. It can also claim the input tax. However, if the value of all gifts to the same employee, in the twelve-month period ending with the date of the Christmas gift, does not exceed £50, there is no need to account for the output tax, while the input tax can still be recovered in full.
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