Blog: Avoid falling foul of the taxman this Christmas
By Andrew Carson, senior personal tax manager at mid-tier accountancy firm, French Duncan.
It’s the most wonderful time of the year and the season of goodwill, however there can be a sting in the tail for employers and employees if they are not up to speed with current tax regulations around corporate entertaining and gifts.
First off, there is the fun-filled office Christmas party which can be the social highlight of the year for many workplaces. HMRC will allow employers to spend £150 (inclusive of VAT) on each employee, and guests if invited, on the assumption that attendance at the party is made available to all staff. This means that there will be no tax charges if the event costs less than £150 per head. While this seems generous in the first instance, there is a catch - £150 per head is actually the maximum annual amount for each employee for any single event.
For example, if a workplace has a summer party which costs £80 per head and a Christmas party which costs £100 per head, then employers can choose to exempt one function but tax and national insurance will be payable for the other. In this case it would be more efficient to exempt the Christmas party which will mean that a tax charge will arise for employees who attended both functions or just the summer party.
Secondly, there is the issue of Christmas gifts - employers often want to provide a gift to their staff at Christmas to keep morale high. If the employer decides to provide a present in cash, or vouchers which can be exchanged for cash, then this will be taxable as earnings for that period, with tax and national insurance contributions deducted via the payroll. If the vouchers are exchangeable for gifts and services only then these gifts will not be taxed via the payroll and will be classified as a benefit in kind.
The employer can provide employees with a gift of up to £50 at Christmas and this will be exempt under the new trivial benefit rules – as long as the employee is not contractually entitled to the gift. The gift cannot be of cash or cash voucher equivalent, however it can include non-cash vouchers. If the £50 limit is exceeded then the whole amount will be taxable on the employee under the benefit in kind rules.
If any of the above is reportable to HMRC then these benefits in kind will be reported on the annual P11D forms for all relevant employees. The P11D forms must be submitted to HMRC by 6 July following the end of the tax year. Under the P11D rules the employee will pay the tax (by adjustment to their PAYE code) and the employer will pay the national insurance contributions.
Alternatively, the liability could be settled by a PAYE settlement agreement whereby the employer will pick up the tax and national insurance charges. This settlement should be agreed with HMRC in advance. If HMRC agree to the PAYE settlement agreement then the employer will submit their calculation to HMRC by 6 July following the end of the tax year and with payment due by 19 October.
So, while December may be the month for gifts and good will, employers and employees must be aware of their duties as far as the HMRC is concerned.