Christmas parties, staff gifts and trivial benefits: tax-free ways for Chislehurst and Bromley companies to say thank you

December is when a lot of small companies around Chislehurst, Bromley and Orpington book a table for the team, hand out a hamper or send a bottle to a loyal client. Done the right way, most of this can be tax-free for your staff and tax-deductible for your company. Get the details wrong, though, and a thank-you can turn into a taxable benefit that has to be reported to HMRC. Here's how the main rules work.

The annual party: the £150 per head exemption

HMRC allows an exemption for annual staff functions, such as a Christmas party or a summer event. There's no tax or National Insurance for employees as long as:

• the event is annual, not a one-off
• it's open to all your employees, or to everyone at a particular site if you have more than one
• the total cost is £150 or less per head for the tax year, including VAT

The £150 covers everything connected with the event: food, drink, entertainment, and transport home or overnight accommodation if you provide them. Work out the cost per head by dividing the total by everyone who attends, including guests. If an employee brings a partner, the cost for both counts towards that employee's £150.

It's an exemption, not an allowance. If the cost per head goes even slightly over £150, the whole amount becomes taxable, not just the excess. If you hold more than one annual event, the £150 is shared across them, so plan the year rather than just December.

Directors are employees too, so a small company with only directors can still use the exemption, provided the event is genuinely for all staff.

Corporation Tax and VAT on the party

The cost of a staff party is normally an allowable expense for Corporation Tax as staff entertaining. VAT-registered businesses can usually reclaim the VAT. The exception is where only directors or partners attend: HMRC treats that as business entertainment, and the VAT isn't recoverable. Inviting clients or suppliers adds a business entertainment element too, which isn't deductible and doesn't qualify for a VAT reclaim, so keep a note of who attended.

Small gifts to staff: trivial benefits

A turkey, a bottle of wine, a box of chocolates or a small hamper can be completely tax-free under the trivial benefits rules. A benefit is trivial if:

• it costs £50 or less per employee, including VAT
• it isn't cash or a cash voucher
• it isn't a reward for work or performance
• it isn't in the employee's contract or given in exchange for salary

There's no limit on the number of trivial benefits you can give an ordinary employee, as long as each one genuinely meets the conditions. Store gift cards that can only be spent on goods are usually fine. A voucher that can be swapped for cash is treated as cash, so it isn't.

For directors of close companies, which includes most owner-managed limited companies, there's an annual cap of £300 per director for trivial benefits. The cap also covers members of the director's family or household who aren't employees themselves.

If a gift is over £50, the whole value is a taxable benefit. You'd then either report it on a P11D or cover the tax for staff through a PAYE Settlement Agreement.

Christmas bonuses

A cash bonus is earnings. It goes through payroll like normal pay, with income tax and National Insurance deducted and employer National Insurance due on top. It's still a tax-deductible cost for the company. If you'd like staff to receive a set amount in hand, ask us to work out the gross figure before you announce it.

Gifts to clients and suppliers

Client gifts follow different rules from staff gifts:

• A business gift is only deductible for Corporation Tax if it costs £50 or less per recipient in a year, carries a conspicuous advert for your business (such as your logo), and isn't food, drink, tobacco or a voucher.
• So a branded diary or mug can be deductible, while a bottle of wine or a hamper for a client usually isn't, even if it's modest.
• For VAT, you can reclaim input tax on business gifts, and there's no output VAT to account for where the gifts to the same person total £50 or less in a 12-month period.

Taking a client out for a Christmas lunch is business entertainment. It's a perfectly normal thing to do, but it isn't tax-deductible and the VAT can't be reclaimed.

Keeping it tidy in your books

If you use Xero or similar cloud software, set up separate accounts for staff entertaining, client entertaining and gifts. Attach the receipt and a quick note of who attended or received each item. It takes a minute at the time and saves a lot of guesswork at year end, especially when your accountant needs to split deductible and non-deductible costs or check you're within the £150 and £300 limits.

How Muftals can help

We're a chartered firm (ACCA and CIMA) on Bromley Lane in Chislehurst, looking after small limited companies and their directors across Bromley, Orpington, Swanley and NW Kent. We can check your plans before you book, run payroll for bonuses, and make sure your benefits and expenses are dealt with correctly at year end.

Book a free first call on 020 7078 7546 or send us a message. We're open Monday to Friday, 9am to 5:30pm.

This article is general guidance based on the rules at the time of writing and isn't personal advice. Please check with us before relying on it for your own business.