If you are sending gifts to employees this Christmas, there are certain tax, National Insurance (NI) and reporting obligations that need to be considered.
What are the rules?
The tax and National insurance requirements are dependent on the type of gift your employees are due to receive – specifically if it is a cash bonus or the gift is of a significant value.
A cash Christmas bonus given to employees is classed as earnings by HMRC, meaning you will need to add the value to their earnings and deduct and pay Pay As You Earn (PAYE) tax and Class 1 National Insurance through payroll.
Where material goods are given as a Christmas gift, it should be considered if the gift can be classed as a trivial benefit.
The following conditions constitute a trivial benefit
- It costs £50 or less to provide;
- It isn’t cash or a cash voucher;
- It isn’t a reward for work or performance; and
- It isn’t in the terms of the employee’s contract.
If the gift does qualify as a trivial benefit then there is no requirement to pay tax or NI or to notify HMRC. Trivial benefits are capped at £300.00 per tax year for directors, office holders and their families.
In the case that the gift is not classed as a trivial benefit, it must be reported on form P11D and Class 1A NI should be paid on the value of the benefit. The whole benefit will be taxed, not just the excess.
If you are not using the VAT Flat Rate Scheme, you will be able to reclaim the VAT incurred on the cost of the gift given to staff, providing it falls within the definition of a trivial benefit.
HMRC set an allowance for staff entertainment for up to £150.00 per employee. This can be used for an in person, or a virtual event. The online event must be available to all staff to attend. The costs are tax deductible and VAT is reclaimable, but only for members of staff, not business owners.
Entertaining Clients and Client Gifts
A business cannot claim a tax deduction for client entertaining, nor can it reclaim any VAT. Similarly, business gifts to clients are not permitted as an allowable deduction, unless the gift is a free sample of your product, or the gift carries conspicuous advertising for your business.