Unfortunately, just because it’s the festive season that doesn’t mean that tax rules disappear. Here Emily Coltman FCA, Chief Accountant to FreeAgent, which provides the UK’s market-leading online accounting system specifically designed to meet the needs of freelancers and micro-businessess, takes a look at the tax implications of some common Christmas costs for businesses.
Is your office full of Christmas cheer? The good news is, unless you work from home, you would be able to claim tax relief on the cost of Christmas decorations and a tree for your office, by putting these in your accounts as day-to-day running costs so that they reduce the amount of profit you pay tax on. If you do work from home (and even if you have dedicated office space within your home), HMRC would almost certainly say that these are for your personal enjoyment rather than for business, and wouldn’t allow you to claim them.
Gifts to clients
The festive season is a great time to show your customers how much you appreciate them – in fact, we’ve written a whole article about how you can go beyond the Christmas card to build great client relationships this Christmastime. If you do give your valued customers and suppliers a Christmas gift like some festive chocolates or bottle of wine, you should record the cost of these gifts as business entertaining. Unfortunately, you normally can’t claim tax relief or reclaim input VAT on these gifts, unless they:
– contain a conspicuous advert for the trader (that’s your business), AND
– are NOT food, drink, tobacco or a voucher that’s exchangeable for goods, AND
– the cost of that gift and any others to that person in the tax year / accounting year is under £50
This is one reason why so many businesses give logo-embossed diaries, pens, and bottle openers as Christmas gifts!
If you’re registered for VAT, you have to pay VAT to HMRC if you make gifts worth more than £50 a year to any one person, so that is worth keeping in mind!
Christmas parties are a great way to show how much you appreciate your employees and clients, but make sure you understand the different rules for tax – they can change depending on who attends your party.
Christmas parties for staff
The main tax implication of staff Christmas parties is whether you need to report the cost of the party as a taxable benefit for your employees – in some cases, you can throw a staff party without incurring any extra tax for you or your employees. Check out our full article about staff Christmas parties for all of the details and exceptions.
Christmas parties for clients
If you want to give a Christmas party for anyone other than your staff, HMRC would consider this to be business entertaining, so while you should still add it as a cost in your business books, when you are calculating your profit for tax you should add these costs back on, so that you don’t claim any tax relief. You also can’t reclaim any VAT on these costs – bah, humbug! If all of this sounds a bit complicated, remember that FreeAgent automatically handles the tax treatment of business entertaining costs!
Christmas bonuses for staff
If you have staff, you may want to give them a Christmas bonus or gift to show your appreciation for their hard work. Here’s some guidance about what tax impact your gifts may have:
If you’re paying your staff a Christmas bonus, this is treated the same way as regular earnings, so you should run it through the payroll and pay PAYE and National Insurance on it as normal.
If the gift doesn’t have a cash value, for example if you gave your staff a turkey or a box of chocolates, then HMRC may well accept that it’s a “trivial benefit” – a small gift that’s given for personal reasons, rather than reasons relating to employment. For example, a box of crystallised fruit at Christmas could be trivial, but a long service award would relate to employment and so wouldn’t be considered ‘trivial’. If you’re giving a trivial benefit, you don’t have to report it on form P11D and don’t need to pay any extra tax or National Insurance.
If the gift does have a cash value, for example it’s a token or voucher, you would need to report that value on that team member’s form P11D. You would also have to pay class 1A National Insurance on the value of the voucher.
Unfortunately, HMRC isn’t so generous that it automatically gives tax relief just because a cost relates to Christmas! As ever, if you are in any doubt about whether you can claim tax relief, speak with your accountant.
Emily Coltman FCA is Chief Accountant to FreeAgent. FreeAgent provides an award-winning online accounting system for freelancers and small businesses.