When it comes to indulging in the Christmas spirit, Her Majesty’s Revenue & Customs is not generally known for its generosity.
Indeed, since the 2010 Bribery Act came into force, there have been strict rules and regulations on gift giving, which could see overly-magnanimous companies landed with a hefty tax bill.
This means that, while there is no doubt that giving is good, questions relating to how much, what and to whom require careful thought – and not just at Christmas, but all year round. For instance, gifts handed out to staff must be treated differently from those made to clients.
Another important consideration, however, is to view the issue of Christmas giving within an annual context in order to comply with any caps on expenditure.
Customer considerations
For many companies, corporate hospitality is a fundamental part of doing business. While there may be no tax relief on gifts to clients or customers, organisations can give away branded products or samples that are associated with their business, with the exception of food, drink or tobacco.
If the products do not carry a company brand or logo and are not valued at more than £50 plus VAT, they are allowable. But tax can only be reclaimed if the annual limit of £50 per head has not been breached.
Christmas perks
Despite the current economic climate, providing a Christmas party or other forms of staff entertainment still make sense in general terms because the cost is tax-deductible. VAT can also be reclaimed as long as the costs relate wholly to providing the party or other entertainment.
But there is a £150 cap on the amount that a company can spend on any one member of staff in a given year. This means that, if more than one event is held annually and the £150 per head limit is breached, the company could be liable for tax, not only on any excess over the £150 limit, but for the entire cost of the event itself.
Organisations also need to be aware that, should clients or employees’ spouses attend the party or event, they will not be able to deduct VAT on the costs incurred in relation to these non-staff members.
Softer benefits
But Christmas celebrations can have softer benefits that go beyond considerations that are purely financial. Dean Hunter, managing director at HR consultancy, Hunter Adams, believes, for example, that they are a nice gesture of thanks and can be effective in boosting staff morale and encouraging team bonding.
“Treating staff to a Christmas dinner is a great way for managers to thank them for their help during the year. It shows appreciation as well as allowing the team to relax in a social atmosphere,” he says.
But once employers start providing workers with gifts, parties or dinners, they have to be prepared to commit to making it a regular thing. “Adopting the Ebeneezer Scrooge approach by cancelling the Christmas party or dinner can send the wrong signals to staff. It’s much better to cut something else from the budget,” Hunter warns.
But he also believes that rewards should not be limited to the festive season and should instead be part of an employer’s annual programme of employee rewards.
“Managers buying bottles of bubbly or expensive chocolates for their staff may think they’re doing the right thing, but if there is not a culture of appreciation and generosity at times other than Christmas, flashing cash on festive presents is unlikely to make people feel genuinely valued,” Hunter says.
The little things
And where budgets are tight, organisations can give staff what the taxman considers to be ‘trivial’ gifts such as bottles of wine or boxes of chocolates, without incurring tax liabilities.
These kinds of presents are preferable to offering cash bonuses, which will have to be put through the payroll system and taxed in the usual way. This is because they are regarded as earnings and are, therefore, subject to PAYE and National Insurance.
But it also worth remembering that going back to basics and simply saying thank you to staff costs nothing and can often mean more than material gifts. A hand-written Christmas card will have more of an impact, for instance, than a flashy empty gesture.
Charitable giving
Many employers and their workers give to good causes at Christmas time. But whatever the time of year, it is worth making sure that any such financial gifts are made in a tax-efficient way.
For example, as UK taxpayers, staff should always be reminded to tick the ‘Gift Aid’ box. Because this enables the charity concerned to claim tax back from the government, the amount of their donation will be increased. For example, as the current basic tax rate is 20%, a £10 donation that is Gift Aided will be worth £12.50 to the charity.
But employees can also give money to good causes directly from their pay packets, pension or self-assessment tax returns, while higher rate taxpayers may even be able to claim some of the tax back from their donations.
It is also worth noting, however, that giving any asset to charity will mean it becomes eligible for capital gains tax relief. As a result, should someone leave more than 10% of their estate to a good cause, the amount of inheritance tax payable on the remainder is lowered from 40% to 36%.
Ask an expert
When it comes to gift giving, many managers are often reluctant to seek advice from either the finance department or their accountants because they tend to assume that any spending on staff will be discouraged.
Given the financial penalties that can be incurred for not staying within the law, however, a quick conversation with an expert could make all the difference. While Christmas may well be a time for giving, no one unwittingly wants their goodwill act to unnecessarily boost the coffers of the taxman.
Ian Williams is a partner and chair of chartered accountancy firm, Campbell Dallas.
