Understanding employee benefits & tax: can I make a gift to employees and clients?

You may want to show your appreciation by giving employees or clients gifts during the festive season. However, here are some tax rules you need to be aware of. ​

Trivial benefits include small gifts to employees, for example for Christmas or their birthday, that cost less than £50 (including VAT and delivery). ​

Trivial benefits are tax deductible (for corporation tax if you’re a company or income tax if you’re a sole trader) and they have no National Insurance or PAYE implications.​

An example might include chocolates, flowers or a bottle of wine. ​

If gifts exceed £50 then they will need to be reported on the employee’s P11D and income tax and National Insurance contributions will be payable. ​

If a gift costs more than £50 then the full cost would be treated as a taxable benefit. For example if you gave a gift worth £75 the £50 is not an allowance meaning only £25 would be taxable, the full £75 is the taxable benefit. ​

If you're interested to know more, HMRC has a detailed guideline on tax on trivial benefits.​

Any gifts in the form of cash are treated as earnings, meaning they need to be processed through payroll and income tax and national insurance contributions paid.​

If vouchers are given then they would be treated the same way as cash if the vouchers can be exchanged for cash. If vouchers cannot be exchanged for cash and are under £50 they are trivial benefits (see above). ​

If non-cash vouchers exceed £50 they are treated as taxable and need to be reported on the P11D and the relevant income tax and NIC liabilities paid. ​

If your employees receive benefits from third parties as a result of their employment there is no taxable benefit as long as the cost of the gift does not exceed £250. ​

Christmas gifts to anyone other than employees is likely to be treated as entertainment and therefore not a tax deductible expense. ​

If a business gives away its own goods and services (which it ordinarily trades in) to the general public either free of charge or for a subsidised payment as a method of advertising then it is treated as deductible. In order to be treated as advertising the items need to contain your own company’s branding or logo, for example branded pens or stationary, or be a product that your company usually produces. ​

However, if a Christmas hamper is gifted to clients then this would be treated as entertaining and is not tax deductible. ​

Read more: A guide to entertainment expenses​

Staff entertainment is allowable, unless it is incidental to the cost of entertaining customers. ​

If an employer puts on a Christmas party for the benefit of their employees only, with the intention of motivating staff and boosting morale, then this is deemed to be expenditure incurred in the ordinary course of the trade and is tax deductible. ​

If, in contrast, you put on a party for customers to thank them for their custom over the year and staff were also invited to attend and to serve food and drinks, this would not be treated as tax deductible. ​

In order to avoid a staff Christmas party being treated as a taxable employee benefit, the event must be an annual function (such as a Christmas party), be provided to all employees and the cost cannot exceed £150 per head.  ​

If the cost of the event exceeds £150 per head it is still tax deductible for corporation tax or income tax purposes, but PAYE and NIC will be chargeable on the full cost of the event. ​

Since it is often difficult to assign the cost of putting on an event to individual employees, employers often choose to pay for the PAYE and NIC obligations that are usable payable by the employees via a PAYE Settlement Agreement (PSA) which means the employer instead meets these liabilities. ​

If you put on a party for the enjoyment of both staff and customers you will need to work out the proportion of costs that relate to customer entertainment and the proportion that relates to employee entertainment. For example if you went to a hotel for a dinner (ie your employees weren’t serving your clients) and attendance was 50% employees and 50% customers, then 50% of the cost would be tax deductible and 50% would be disallowed. ​

VAT can’t be claimed on non-deductible entertainment expenses. ​

The general rule is that VAT incurred on goods and services used for a business purpose can be recovered as input tax. However, if this input tax is incurred by you on the provision of business entertainment to UK business contacts and non-UK business contacts who are not customers it cannot be recovered. ​

The input VAT incurred on employee entertainment can be reclaimed, since it is incurred wholly for business purposes, except in the following two cases:​

Resources: 10 common VAT mistakes small business owners should avoid​

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