Have you thought about how you might treat your employees or customers this festive period? It is important to be mindful of the applicable tax laws this Christmas season, since Christmas gifts may be taxable.
Are gifts considered taxable income?
Christmas gifts given in cash to employees constitute as taxable earnings, therefore, they will be charged income tax and national insurance contributions (NICs). For vouchers that may be redeemed for cash, the same rules apply.
Gifts that are taxable must be disclosed on the employee’s P11D form.
What gifts are tax-free?
Christmas presents, and other seasonal gifts, may be given tax-free provided they fulfil certain requirements:
- The benefit is offered at no cost greater than £50 (or the average cost per employee if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person). The whole amount of a gift is taxed under the standard benefits rules if the cost of the gift, including VAT, exceeds £50.
- The benefit is neither cash nor a cash voucher.
- The benefit is not owed to the employee as a result of any contractual obligations (including under salary sacrifice arrangements).
- The benefit is not given in appreciation for specific services delivered by the employee while performing their job obligations (or in anticipation of such services).
Is there a limit on tax-free gifts?
Besides the £50 per employee limit, there is no annual limit on trivial gifts that may be made to an individual employee throughout the year.
Only “close” businesses, such as those owned and managed by five or fewer members of a family, are exempt from this rule. The exemption is limited to a total cost of £300 for the tax year where the employer is a “close” business and the benefit is given to a director or other office holder of the business (or a member of their family or household).
As the Christmas season approaches, many companies are looking to buy presents for their customers. In such a circumstance, you need to be aware of the potential tax repercussions. There are a few rare cases when such expenditures are tax deductible.
For instance, you may deduct the cost of a branded item you buy. However, if the gift is exchangeable or costs more than £50, you can not.
Gifts that are not for advertising or that cost more than this amount are considered entertainment and are not tax deductible, even if they have a logo.
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