Giving gifts and holding parties is part of the festive season. It is a good feeling to reward loyal staff and customers. One way to make your money go further is to make the most of available tax reliefs. That way you leverage your money effectively and HMRC is kept onside and happy.
Let’s look at ten ways you can keep reduce your tax bill during this season of goodwill.
Tax-free business gifts to customers
These are only allowable as a tax deduction if the total cost to each customer per year is less than £50 and the gift bears a conspicuous advert for the business and it isn’t food, drink, tobacco (unless they’re samples of your products).
Tax-efficient client entertainment
You may have read somewhere or been told by your accountant that client entertainment is not tax deductible. And this is true. But bear in mind that if you happen to entertain clients this Christmas and you meet any of the following two conditions, you can claim these expenses against your tax. These are the so-called exceptions to the rules.
Contractual obligation: Where it’s part of your business to entertain, say if you’re providing a training course to businesses and you entertain them as part of the course – maybe providing tea, coffee, lunch and so on – even if it’s food, you’re still allowed to claim that because you’re under a contractual obligation to give them food.
Quid pro quo: Let’s say you’re a freelance writer and you want to speak to Jo, who has a world of experience on a topic you’re writing about. You offer to take Jo out to lunch this Christmas in exchange for insights into the topic which you’re researching. Because Jo is coming to the table with something of value but not benefitting from it apart from getting free lunch, you’re actually allowed to claim the expense, even though it appears as entertainment.
In order to keep HMRC onside, keep plenty of evidence to support your claim.
Tax-free Christmas parties
It seems to be common knowledge that an employer can spend up to £150 per head including VAT per year, in providing annual social functions to entertain staff.
But there are points to bear in mind. This £150 is per head and not per staff member. To work out the cost per head, divide the total cost by the number of attendees (staff and any other guests). When employees’ spouses and partners attend the event you can budget for £300 per couple. The £150 is not an allowance. It’s an exemption. This means if the cost per head works out at £151, then the full £151 is taxable and not just the £1 excess. So, keep an eye on the final number of attendees as dropouts could spoil the “tax party” for you and your staff.
Perhaps you want to have two parties in a year. What happens if the first party is budgeted at £145 per head and the second at £100 per head? The £150 limit can be used against the first party leaving the second party as a fully taxable benefit.
To keep HMRC happy, ensure that the annual event is a staff social event and open to all staff. Keep proper records especially on the number of attendees. HMRC’s site has more info. Search for EIM21690.
Tax-free staff awards
As the end of December approaches you might decide to recognise exceptional staff members for their outstanding contribution to your business and for going beyond their call of duty.
Did you know you can pay your staff tax-free income for suggestions that benefit your business? Yes, you can. And there are two kinds of awards:
- encouragement awards – for good suggestions, or to reward your employees for special effort
- financial benefit awards – for suggestions that will save or make your business money
Encouragement awards are tax-free up to £25. But financial benefit awards are exempt up to £5,000. That’s right £5,000.
Before you go ahead and pay your staff tax-free income this Christmas, please note that as with all tax reliefs and tax exemptions, there are conditions to meet.
Some of the conditions for staff suggestion scheme includes:
- the suggestion scheme must be open to all your employees
- the suggestion must relate your business
- your employee must go beyond their call of duty (i.e. suggestions made as part of their normal work will not count)
- the suggestion can’t be made at a meeting for proposing new ideas
To HMRC happy, have a look at what they say on this. Search for EIM06600 on the website.
Tax-free gifts to Employees
In addition to awards, gifts you give to your employees are normally exempt from tax and NI. However, this exemption only applies if the gift is deemed to be trivial. For a gift to be considered a trivial benefit, it must cost £50 or less, and not be part of the employees’ contract or a reward for performance. It must also not be a cash reward as HMRC will tax this as earnings (payroll tax). So classic gifts, including a bottle of wine or box of chocolates, would be exempt from tax.
If you give your employees cash vouchers, the amounts would need to be put through the payroll and subject to tax and National Insurance. Non-cash vouchers up to £50 may be exempt under the trivial benefit rules. Where the voucher exceeds £50, you will need to report these on a P11D form to HMRC.
Inheritance tax-free gift
Gifts between family members are normally dealt with under the inheritance tax code subject to the various reliefs and the seven-year rule. This rule, also called PET (Potentially Exempt Transfer), says that if you make a gift and then survive for seven years afterwards, the gift becomes exempt (i.e. no tax is payable) and therefore falls outside of your estate for tax purposes.
Luckily, the inheritance tax code has some pretty generous reliefs and exemptions including an annual exemption of £3,000 and a small gift exemption of up to £250 a year.
Christmas and tax incentives
A recent study by Gallup study says that around 60% of employees are not engaged in the work they are doing– they are ‘dialling it in’. However, most employees look forward to Christmas. Why not tap into this and announce some good staff retention and performance incentives at Christmas? You can consider things like tax efficient share option schemes if appropriate or tax efficient remuneration packages. How about Christmas shopping half day off? This may well save you some recruitment costs in the New Year.
Long service awards
If you and a long-serving employee decide it is time for them to move on, December might be a good month to say your goodbyes. You can give them a non-cash award of up to £1,000 if certain conditions apply. Search HMRC’s site for ‘long service award’ for more details.
Plan ahead for next year
If you realise you have missed some opportunities this year, talk to your accountant or tax adviser and plan ahead for 2019. Do this and you’ll ensure you take advantage of the tax reliefs available.
For now “Season’s Greetings!”
Jonathan Amponsah CTA FCCA is an award-winning chartered tax adviser and accountant, and the CEO of The Tax Guys.
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