As the weather gets a little colder it’s good to keep warm indoors and celebrate the season of goodwill. It’s also a time to enjoy staff parties, give Christmas bonuses and some well-deserved annual awards.
Adding the costs up, Christmas looks to be just as expensive for businesses as it does for individuals. Yet, all this goodwill can generate some handy tax deductions that will keep both your accountant and your HMRC team happy. Here, are some Christmas tax-deductible savings you can make as told by Jonathan Amponsah the CEO of The Tax Guys.
Awarding staff ‒ £5,000 Tax-Free
Awards are a fun way to celebrate the end of the year and to highlight staff who have made outstanding contributions. It’s also an opportunity to award staff members with up to £5,000 completely tax-free!
There are two types of awards to consider: Encouragement and Financial Benefit awards.
Encouragement awards can be given as rewards for good suggestions or an extra-special effort. They’re tax-free up to £25.
Financial benefit awards can be rewarded for suggestions that will make or save the business money. These awards are exempt up to a whopping £5,000!
As with all tax reliefs and exemptions, there are some conditions the awards for suggestions have to meet. The suggestion scheme must be open to all staff and be related to your business. Suggestions also need to be in addition to the normal day-to-day work, so they can’t be made at a meeting and the idea must go above and beyond the norm.
To check if you are eligible, head to the HMRC website and search for reference EIM06600 for a full rundown. Even if you don’t qualify this year, it may provide some food for thought for 2020.
Christmas parties ‒ up to £150
A staple of the festive season is the staff Christmas party. A chance to cut loose a little and celebrate with staff. Most business owners are aware that they can spend up to £150 per head (incl. VAT) tax-free on social functions to entertain staff.
But did you know that the £150 limit is per head and not per staff member? So that means you need to divide the cost of the event by the number of attendees, even if that includes spouses and partners. Essentially, you can budget for £300 per couple.
However, this also works in reverse. So, if someone drops out and the party ends up costing £151 or more per head, then the full £151 is taxable, not just the additional £1. So, watch out!
It’s also worth bearing in mind any other parties or entertainment throughout the year. Many workplaces now do summer parties as well as a Christmas party, and these will both count towards your £150/year exemption and cannot exceed that limit.
We recommend keeping records of attendance as well as ensuring all staff are invited to maximise your budget while keeping in HMRC’s good books. For more info search for EIM21690 on HMRC’s site.
Staff gifts ‒ up to £50
What would Christmas be without presents?! Fortunately, gifts to employees are typically exempt from either tax or NI. So, feel free to splash out…just keep it under £50.
This is because HMRC considers any gift worth less than £50 to be trivial. It also can’t be a cash gift or be a part of the employee’s contract or performance reward, otherwise, it would be taxed as earnings.
To be safe, stick to traditional gifts, such as a bottle of bubbly, a box of chocolates, or perhaps a board game, and keep it to less than £50 or under per person.
Vouchers ‒ up to £50
What to get for the person with everything? Vouchers, of course!
Non-cash vouchers (those redeemable against products and not exchangeable for cash) fall under the trivial benefit rules outlined above. So, if you’re not sure what to gift staff, they can be a great quick solution. Vouchers that can be exchanged for cash will need to go through payroll and will be subject to tax and NI. Additionally, any voucher that exceeds the £50 limit per person will need to be reported to HMRC on a P11D form.
Customer gifts ‒ up to £50
Staff aren’t the only ones that you can buy presents for ‒ customer gifts are tax-free up to £50 as well. More presents for the tree!
The total gifting amount much be under £50 per customer over the entire year. So, if you’ve already sent out birthday or loyalty gifts this year, you may not be eligible. You also need to ensure that the gift bears a conspicuous advert for your business and isn’t food, drink or tobacco (unless they’re samples of products). Stationary can be a useful gift and remind clients about your brand, for example. You may have some more exciting ideas.
You’ve probably been told at some point that client entertainment is not tax-deductible. While this is technically true, there are some instances where it is perfectly acceptable: when it is part of a contractual obligation, such as a training event, or where there is quid pro quo.
If part of your business involves entertaining your clients, you are able to claim the expense on your tax return. Say, for example, you run teambuilding days. You will be expected to provide some entertainment to your clients as part of the experience. It’s likely that refreshments and/or a meal may be included as well. It can all be claimed as it is part of your contractual obligation to supply those things.
Quid pro quo applies when the entertainment is payment for a service. If you were to meet a PhD student for lunch, for example, because you’re researching something involved in their thesis, as long as they aren’t receiving any payment (other than a free lunch) you can claim the expense. Just, make sure you keep records of your conversations and other evidence to keep HMRC happy!
As a manager of people, you need to be constantly looking for ways to keep your staff engaged and interested in their work, as well as well-motivated and in high morale.
One way of achieving that this Christmas could be to offer retention and performance incentives. The incentive could be share options or improved remuneration, which could both work out as tax efficiencies, saving you money. Keeping staff happy also helps reduce recruitment costs too!
Long Service Award ‒ up to £1,000
Another way to improve retention can be to reward long-serving members of staff with a non-cash award of up to £1,000. Not only is this a nice Christmas bonus but it might also be tax-exempt. Search “long service award” on the HMRC website for more information and eligibility criteria.
Inheritance Gifts ‒ up to £3,000
If you gift a large value of money or assets to a family member, inheritance tax rules usually kick in. There is, of course, the seven-year rule, otherwise known as the Potentially Exempt Transfer (PET) rule. This rule says that is you make a gift and then survive for another seven years at a minimum, then the gift becomes exempt from tax.
However, there are some fairly generous reliefs and exemptions, allowing gifts of up to £3,000 a year as well as a small gift exemption of up to £250 a year. So, if you’re looking to shave some money off your personal tax liability, consider gifting money this Christmas.
As you can see, there are plenty of ways to reduce your tax liability while sharing some cheer with your staff and clients. Knowing exactly what you can save where, when, and how is rarely straightforward, however. We recommend getting advice from a good accountant or tax advisor to review your accounts. Then they can help you look ahead and plan for the New Year so you can maximise your tax exemptions throughout 2020.
Here’s to a happy Christmas and a prosperous New Year!