• So what has tax got to do with Christmas? Well the disciple Matthew (also known as Levi – did tax inspectors have to go by aliases in the 1st century Holy Land?) was a tax inspector, thereby proving presumably that anyone is capable of redemption.
• However, Christmas can be a tax minefield for unsuspecting generous business owners, who find that that treat for the employees or customers comes with added tax problems.
• Let us start with that perennial favourite, the office Christmas party. Apart from being the HR department and photocopier repair man’s worst nightmare, what can go horribly wrong for a tax point of view?
• Contrary to a spoof Taxation article written by one of my friends, office romances do not give rise to a taxable benefit (“Pay as you yearn?”), but other tax dangers lurk at the office party.
• First of all the good news. If, as an employer, you hold an annual event open to all employees with a cost per head not exceeding £150, it is not a taxable benefit for your employees. Even better, spouses, civil partners and significant others can count as ‘heads’ for this purpose as well as the employees.
• And now the bad news. If the cost per head is more than £150, the whole cost is taxable as a benefit. And if you have more than one annual event, the £150 has to cover them all (so you may have to choose which event(s) is or are exempt from tax).
• If you think that’s complicated, on to VAT, and two Tribunal cases featuring those incomparable social events, accountants’ Christmas parties.
• KPMG organised dinner dances for its staff and allowed each of them to bring a guest (presumably to avoid two accountants having to dance with each other)
• KPMG had to apportion the VAT recovery, which was restricted to the part expended on staff entertainment, as the entertainment of non-employees could not be treated as incidental to the treatment of employees.
• Ernst & Young found a neat way around this problem by charging their employees’ guests £15 per head to attend their party.
• Whilst it stretches credibility to believe that someone would actually pay to attend an accountants’ party, someone clearly did because a Tribunal case resulted. Because Ernst & Young had charged guests, it had not provided business entertainment for them, and thus the VAT on their party was fully recoverable.
• Here is another tax minefield. What could possibly be more in keeping with the spirit of Christmas than to give all your customers presents? Well be very careful….
• The cost of gifts made by a business is disallowable unless they qualify as one of the following exceptions:
• Gifts provided as part of the donor’s trade and made for advertising purposes; or
• Gifts incorporating a conspicuous advert for the donor’s trade costing not more than £50 per donee and not consisting of food, drink, tobacco or vouchers or tokens exchangeable for goods; or
• Gifts provided for employees; or
• Gifts to charities or other similar local organisations for educational, cultural, religious, recreational or benevolent purposes.
• Before you get too excited about the tax deduction for gifts to employees, the chances are they will be taxable on the value of what you give them (but see below for a list of exceptions).
• If unconnected third parties choose to make gifts to your employees, the latter stand a slightly better chance of escaping tax, provided the gift does not arise from services rendered during the course of their employment, represents goods (or vouchers to obtain them) and costs less than £250 per head.
• There are some items which you can give your employees free of tax – they may not all be very seasonal, but beggars can’t be choosers:
• Cycles and cycle safety equipment (this is a great piece of tax law. They must be used mostly for home to work travel, but employers are not expected to monitor employees’ use of the equipment. So presumably the employer says “You will use this mostly for home to work travel, won’t you?” and the employee says “Yes”. Do remember to have, and make a note of, this conversation though.)
• Mobile phones – if you want to give your employees mobile phones that’s up to you……..
• Car parking vouchers (particularly useful for those who drive cars)
• Childcare vouchers (particularly useful for those who have children)
• Meal vouchers up to 15p per day per employee (particularly useful for those who have stomachs – this one in isolation is probably not likely to ensure a lifetime of loyal service)
• There is VAT on the cost of a gift of goods, except:
o Where the donor has not and will not become entitled to input VAT recovery on the gifted item; or
o Where the cost to the donor of gifts to the same donee in a 12 month period does not exceed £50; or
• Gifts of services are free of VAT.
Vouchers and credit tokens
• The tax provisions re: vouchers follow fairly closely those re: gifts in other forms. They are not taxable if they are made available to employees on the same terms as to the public; otherwise they give rise to a benefit-in-kind based on the cost to the employer, unless they are cash vouchers, in which case the redemption value is taxable.
• Disallowable unless:
o Provided as part of the trade and for payment or free of charge for advertising purposes (e.g. by a hotel or restaurant); or
o Provided for employees (other than incidentally in entertaining non-employees).
• Such incidental entertaining for employees is not taxable as a benefit-in-kind.
PAYE Settlement Agreements (“PSA”)
• Where gifts to employees would give rise to relatively small tax and national insurance liabilities, the employer can arrange with HMRC to pay those liabilities itself by way of a PSA, in order to avoid the employees being taxed personally on the benefits. PSA’s are simple to arrange and a convenient way of dealing with this issue.
Summary & Conclusion
• So have a good time at Christmas, but don’t do anything you may live to regret (like incurring unexpected tax liabilities on behalf of yourself or your employees).
• And remember, tax planning is for life, not just for Christmas.
• Santa Simpson: 0161 886 8062 or firstname.lastname@example.org