As Christmas approaches many employers will be turning their minds towards arranging their staff Christmas function.
For the employer, the cost of providing an annual event for employees, for example the staff Christmas party, is tax deductible as an expense of the business.
For the employee attending the event there is an annual tax free amount of up to £150 per head provided that the event is available to all employees or, where the employer has more than one location, is available to all employees at the same location.
The cost per head of attending the event is calculated by dividing the total cost of the event, including VAT and any accommodation and transport provided, by the total number of people who attend, including non-employees.
The exemption is an all or nothing benefit i.e. if the cost per head exceeds £150, the employee will be chargeable on the whole cost, not just the excess over £150, in respect of themselves and any member of their family or household who also attend the event as a guest.
If the employer provides more than one event during the tax year, for example a summer event and a Christmas event, no tax charge will arise where the aggregate cost per head of all of these events does not exceed £150, however, where the aggregate cost per head exceeds £150, whichever function best utilises the £150 will be exempt and the other event will be chargeable.
Input VAT is recoverable by the business on expenditure relating to staff entertainment but cannot be recovered on the proportion of expenditure relating to guests e.g. partners or spouses.
As far as Christmas bonuses paid to employees are concerned, these will be taxable as earnings via the PAYE system. These also include vouchers redeemable for cash. Other gifts to employees may be chargeable as benefits.
HM Revenue and Customs have conceded that an employer may provide employees with a trivial seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas, however, a case of wine or a Christmas hamper is unlikely to be considered trivial.
Client entertainment is not tax deductible as an expense of the business and input VAT is not recoverable on such expenses.
Gifts to clients will only be tax deductible as an expense of the business if they carry a conspicuous advert for the business, are not food, alcohol, tobacco, or vouchers exchangeable for goods and the total cost of the gift and any other gifts made to the same individual during the relevant tax period does not exceed £50.