9 ways to make Christmas tax deductible
When you add everything up Christmas can be just as expensive for businesses as it is for individuals. Yet, all this goodwill can generate some useful tax deductions that will keep both your accountant and HMRC happy.
Here are a few ways to bring some tax free Christmas cheer.
Christmas Parties ‒ up to £150
We love a staff Christmas party. Most business owners know that they can spend up to £150 per head (incl. VAT) tax-free on social functions to entertain staff.
But the £150 limit is per head and not per staff member. This means you must divide the cost of the event by the number of attendees, including spouses/partners. Essentially, you can budget for £300 per couple.
However, this also works in reverse. 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 be careful!
If you have a summer party plus a Christmas party, remember that both count towards your £150/year exemption and cannot exceed that limit.
We recommend keeping attendance records and ensuring all staff are invited to maximise your budget. For more info see EIM21690 on HMRC’s site.
Staff Gifts ‒ up to £50
Fortunately, gifts to employees are typically exempt from either tax or NI. Splash out…just keep it under £50! This is because HMRC considers any gift worth less than £50 to be trivial.
It can’t be a cash gift or be a part of the employee’s contract or performance reward, this would be taxed as earnings.
For safety, choose traditional gifts, e.g. a bottle of bubbly, chocolates, or perhaps a board game, and keep it £50 or under per person.
Vouchers ‒ up to £50
Non-cash vouchers (those redeemable against products and not exchangeable for cash) fall under the trivial benefit rules mentioned above. If you’re not sure what to gift staff, they can be a great solution.
Vouchers that can be exchanged for cash have to go through payroll and will be subject to tax and NI. 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
Thinking beyond staff – customer gifts are tax-free up to £50 as well.
The total gifting amount much be under £50 per customer over the entire year. 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).
Awarding Staff ‒ £5,000 Tax-Free
Awards are a fun way to celebrate the end of the year and to highlight employees’ outstanding contributions.
There are two types of awards to consider:
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!
Some conditions have to be met. 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 (reference EIM06600) for a full rundown.
You’ve probably been told 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 meet a PhD student for lunch, for example, because you’re researching something involved in their studies, as long as they aren’t receiving any payment (other than a free lunch) you can claim the expense. Make sure you keep records of your conversations and other evidence to keep HMRC happy!
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 if 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, to shave some money off your personal tax liability, consider gifting money this Christmas.
When you manage people, you need to constantly look for ways to keep your staff engaged 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!
There are plenty of ways to reduce your tax, however the only way to be sure to get things right is to hire a good accountant or tax advisor to look at your accounts. They’ll also be able to help plan for the coming year so you can maximise your tax exemptions.
ABOUT THE AUTHOR
Jonathan Amponsah CTA FCCA is an award-winning chartered tax adviser and accountant, and the CEO of The Tax Guys.