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Tax free gifts to employees

Whilst everyone enjoys receiving presents, employees are unlikely to appreciate gifts from their employer with a tax charge attached. Fortunately, a statutory exemption from income tax and national insurance for employees and employers exists.

The current form of these rules took effect from 6 April 2016, and the key conditions are:

  1. The cost of the gift, including VAT, does not exceed £50 per employee.
  2. The gift is not cash or a cash voucher – a voucher which can be exchanged for cash. A non-cash, gift voucher which can be spent in a retail store should be acceptable.
  3. The gift is not provided under a salary sacrifice or other arrangement.
  4. The gift is not provided in recognition of past or future services performed by the employer – a gift on the occasion of Christmas should meet this requirement

This is an all or nothing exemption – if the cost of a gift exceeds £50 then the full value is taxable under the usual benefit in kind rules. Where the benefit is provided to a group of employees and it is impractical to work out the exact cost per individual, then the average cost must come under the £50 limit.

While the general rule is that there is no limit on the number of individual trivial gifts that can be given to an employee (as opposed to a director) in any one year – provided each gift individually qualifies for relief – there are rules which prevent an employer trying to divide a larger gift into several smaller ones.

HMRC’s latest Employer Bulletin highlights how while providing a gift card of £10 would initially fall within the trivial benefit rules, topping up the same card with £10 more than four more times in the tax year will take the total of the benefit over the £50 limit. In that case, the whole series of gifts will be considered a single benefit which then fails to meet the trivial benefit conditions so both the original gift and the top-ups will be taxable.

Company Party

When inviting staff to any work do, it is important to remember that such functions have the potential to be a taxable benefit in kind. If the following 3 conditions are met the event will not be taxable –

1.The party must be annual – The requirement for the party to be annual, rather than a specific relief for a Christmas party, means that if your firm chooses to hold a regular summer function instead (or potentially as well as a Christmas party) then, provided the other tests are met, one or even both could potentially be tax-free for staff. 

2. The event must be available to all employees – The party must be open to all employees at a specific location if the employer has multiple sites. It is possible to hold events by department if preferred, if all staff at that site can attend one of the events. 

If the event is only for selected staff, meaning that the general exemption cannot apply, then it might be worth considering whether the trivial benefits rules might apply instead provided the average cost is under £50/head.

3.The cost per head must not exceed £150 – Where an employer only holds one party for staff in the year, then it is necessary to establish the total cost of providing:

  • the party or function.
  • any transport or accommodation provided for those attending (including non-employees).
  • any related VAT on the costs of the above.

This is then divided by the number of people attending to establish the cost per head. Any non-employees, such as spouses or partners of employees, who attend can be included in the headcount.

Provided the cost per head comes to £150 or less, then the party will be exempt. If the cost is £150.01 per head or more, then the event will be a taxable benefit in kind for staff. The £150 is an exemption, not an allowance, and if it is exceeded, then the whole cost is taxable.

Where an employer holds more than one annual event, for example a Christmas party and a summer function, it is possible for more than one event to be exempt provided that when the cost per head of each event is added together the total is less than £150. For example, a Christmas party costing £75 per head together with a summer outing of £50 per head comes to less than £150 per head and therefore both would be exempt.

If the employer also holds a third event for £45 a head in the autumn, then the three events combined would be over the limit at £170. In this case the employer is permitted to allocate the exemption to the Christmas and summer event, and only the autumn event would be taxable.