Accounting for gifts and entertainment around the holiday season can be confusing.
We’ve spoken with a lot of business owners who’ve felt unclear on the rules one way or another. Some people are under the impression there’s no limit at all on festive gifting, and that they can spend unlimited amounts on their staff and clients without a tax charge.
Others are worried about the implications of giving anything at all, and avoid gifts in fear of adding to their tax bill.
The reality is that at any time of year, you can give small gifts without a tax charge – but those have to be within certain rules and limits.
Tax on small gifts to employees
HMRC allows businesses to give ‘trivial benefits’ to employees without paying tax. A benefit is considered trivial if all of the following apply:
- it cost you £50 or less to provide
- it isn’t cash or a cash voucher
- it isn’t a reward for the employee’s work or performance
- it isn’t in the terms of their contract.
For any other gift or benefit, specific tax rules apply depending on the type of item you give.
There are also different rules to be aware of if you’re providing these benefits as part of a salary-sacrifice arrangement, or if you’re a director of a ‘close’ company (one that’s run by five or fewer shareholders).
If either of these circumstances apply to you, talk to us and we can help you understand your tax position.
Tax on parties and entertainment
The first thing to be aware of is the difference between entertaining staff and clients.
If you’re only entertaining staff – and this has to be current staff, not previous employees – this is considered an employee benefit.
There’s a tax exemption for annual events, as long as they are open to all your employees and cost less than £150 per head.
For any other staff entertainment, you’ll need to report the cost on each employee’s P11D form and pay National Insurance contributions (NICs) on it.
If you’re entertaining clients with the aim of forming or maintaining a business connection, or discussing a business project, this is classed by HMRC as ‘business entertainment’.
This is not an allowable expense so can’t be deducted from your profits – but it won’t attract a tax or NICs charge.
Finally, if you’re entertaining clients for purely social reasons, you’ll generally have tax and/or NICs to pay, depending on who arranged and paid for the event.
This is a complicated area of tax, and one that often comes down to small nuances in the details. HMRC might have a different approach to entertainment with a ‘substantial meal’ compared to small refreshment costs, for example.
Understanding what kind of purpose your event serves and how it might be viewed by HMRC is tricky – that’s where we can help.
We’ll explain the tax rules and how they apply to your situation, and talk you through your next steps.
Get in touch for tips on more ways to streamline your tax position.