HMRC allow a business to spend £150 tax-free on each employee at the Christmas party.

HMRC Rules for eligibility:

  • Any money the company spends by inviting partners or spouses of employees is eligible for tax. This is providing the total expenditure for the party, including the non-employee guests, amounts to £150 or less per employee attending.
  • As a small company, you are still able to claim up to £150 per employee for any Christmas celebration, even if just two or three employees attend.
  • Any money spent on non-employees is viewed as entertainment that means the VAT on that proportion of expenditure cannot be claimed back, so you will need to show the split between employees and their non-employee guests.
  • If the entertainment is only for the partners or directors of the business then the VAT incurred is not input tax and cannot be recovered. But, if they attend a party with regular employees, then the tax is seen as input tax and is recoverable.
  • Do not exceed the £150 per person limit as this will mean the entire amount is disallowed, not just the excess over £150.

A gift to a client

HMRC allows gifts worth up to £50 to a client in each tax year.

HMRC Rules for eligibility:

  • It must be business related; it cannot be alcoholic, food, tobacco or vouchers that can be exchanged for those things.
  • The gift must also carry a clear advertisement for your business; otherwise it would be classed as entertainment expenses.
  • The £50 budget includes the gift-wrapping so go easy on the wrapping paper. If you do go over the limit the gift will be disallowed and liable for tax.

A gift to staff

It’s worth remembering that all Christmas gifts to staff are classed as taxable benefits, except if they’re deemed trivial. Only then are they exempt from tax.

HMRC Rules for eligibility:

  • A bottle of wine or a small box of chocolates are examples of a trivial gift. However, a box of wine or a food hamper are seen as a decent present and therefore, not trivial and completely taxable.
  • All gifts of money (apart from Suggestion Scheme awards, see below) such as bonuses must be put through the payroll system and are subject to tax the same as wages.

Suggestion Scheme awards

A business can reward an employee for making a suggestion that shows special effort on the employees’ part. These are also known Encouragement Awards and are exempt from income tax, but only up to a limit of £25.

Another strand of the Suggestion Scheme awards are the Financial Benefits awards. These are also exempt from tax and can rise to an overall tax-free limit of £5,000. To qualify for one of these the suggestion must meet the conditions below.

HMRC Rules for eligibility:

  • It relates to an improvement in efficiency or effectiveness
  • You must have decided to adopt the suggestion
  • You must reasonably expect the suggestion’s implementation to lead to a financial benefit
  • 10 per cent of the financial benefit you reasonably expect in the first five years following adoption.

A food gift

  • A business can provide their employee(s) with free food and no VAT will be due on the supply
  • If they take a member of staff out for a meal as a reward, as there is a supply of goods made by the restaurant direct to their employee, no input tax is deductible by the business