As we head into the holiday season we will be tempted to carry on the tradition of giving. And if you run a business it might seem like the perfect opportunity to reward your employees for a year of hard work. However, HM Revenue & Customs doesn’t share your enthusiasm in quite the same way when it comes to rewarding staff. However, all is not lost – HMRC makes a few exceptions. Here’s how to and how not to thank them.
1. Cash & vouchers
Steer clear of rewarding cash as HMRC considers it to be liable to income tax, national insurance contributions (NICs) and PAYE reporting, and the same is true of vouchers, used as rewards and incentives (unlike cash, you have to report vouchers under P11D ), or anything that is redeemable in cash.
2. Christmas entertainment parties for staff
Tax exemptions for entertaining employees are available but with some terms and conditions. The relief only applies to “annual” parties, whether it is a Christmas celebration or a summer barbecue. As this exemption does not cover you per event but per tax year, you need to ensure that if you host 2 events for your employees, the joint cost for both events must not exceed £150 per head.
So, if you are hosting a Christmas party, make sure it is open to all employees and doesn’t cost you more than £150 per head per year. It’s important to remember that the £150 per head is not an allowance, but a threshold for exemption. Even a penny above £150 will make the whole cost taxable as a benefit-in-kind. Lastly, remember that the £150 includes VAT and the cost to transport and/or overnight accommodation, and applies to everyone attending the party not just employees. These could be any members of their family and household who attend as guests. If you exceed the £150 limit, either you can report the benefit on each employee’s P11D or pay the grossed up tax on the employee’s behalf through a PAYE settlement agreement (PSA). The exemption can be claimed by all employers, except sole-traders and directors in a partnership.
3. Gifts to employees
As mentioned at the beginning of this post, refrain from gifting cash or vouchers as these are deemed taxable. However, it is okay to gift a seasonal present, such as a turkey, an ‘ordinary’ bottle of wine or a box of chocolates as these are considered trivial and are tax exempt.
As far as a monetary allowance goes, each employee is entitled to receive a promotional gift up to the value of £50 a year. However, if the value of the gift is more than this, it will be thought of as taxable and should be included on the employee’s P11D, or on the PSA.
4. Business gifts to customers
As a business owner, gifts to customers are only allowable as a tax deduction if the total cost of the gift to one customer per year doesn’t exceed £50 – and if they do the whole amount will be disallowed. Importantly, the gift needs to carry a clear advertisement of your business, not just on the wrapping but on the gift itself; otherwise it will be classed under entertainment expenses. Remember that these gifts cannot be food, drink, tobacco or exchangeable vouchers unless you are a trader and these are samples of your product. Common examples of allowable gifts are diaries, pens and mouse mats.
5. Suggestion scheme - awards to employees
If you’ve formally set up a suggestion scheme, which is open to all employees, you can give up to £5000 tax-free for each suggestion that generates a real financial benefit for the company. However the amount of the award is based on a percentage of the expected financial benefit of the suggestion.
6. Encouragement awards
You can reward your employees for a special effort or a good idea and get a tax exemption as long as the cash payment doesn’t exceed £25. If the award exceeds this limit, the extra payment will count as earnings and you’d have to report the extra to HMRC and deduct and pay PAYE tax and National Insurance on it through payroll.
7. Long service awards
If any of your employees is marking his/her 20th year of service you can present them with a monetary award without fear of income tax or National Insurance deductions. However a few conditions apply: firstly, the value of the reward must not exceed £50 for each year of service. Secondly, you must not have made a previous long service award within the last 10 years. So, if an employee is completing 20 years you can present a gift to the value of £1000. Note: as this is an employee reward, it is not available to self-employed sole traders or partners in a firm. However, it is available to directors who receive a salary for their services.
As accountants working with small and medium businesses, we understand that the suggestions listed above won’t have a huge impact on the bank accounts of your employees, but along with keeping the tax Grinch at bay, they will also help you show your personal commitment to your staff and spread the Christmas cheer.