Insights

It has been a while since we offered clients tax efficient Christmas gift ideas so we thought it was time to publish an up to date blog giving festive, tax saving advice. Here are some of the best seasonal gifts from a tax saving perspective:

Tax efficient gifts for staff

1. Staff entertaining (on annual events) up to the value of £150

If you are an employer, you are entitled to treat all your employees with a tax free ‘perk’ each year to the value of £150, which could be for example, a Christmas party or other annual event. To be tax free, the event must be open to all employees, the total amount spent on each employee must not exceed £150 including VAT and this needs to include associated expenses, for example, taxis to and from the venue, or overnight accommodation. Inviting spouses along is a further expense, which must be added to the initial £150 allowance and apportioned for tax purposes.

If the expenditure exceeds this amount the cost of the whole event will be taxable as a benefit in kind and must either be included on the employee’s P11D or paid for by the employer through a PAYE settlement agreement (PSA). Where an employer opts to settle the additional costs using a PSA, the total outstanding amount must be paid in full by 19^th October following the relevant tax year-end.

2. Employee related VAT costs can be recovered

It is worth noting that although the £150 tax-free entitlement per employee includes VAT, any VAT paid can be recovered. However this does not include VAT paid for entertaining others – e.g. spouses or former employees. This receives the same treatment as VAT paid for other forms of business entertaining and cannot be recovered.

3. Tax efficient turkeys

Seasonal gifts made to employees that are deemed to be small or of a minimal value (e.g. chocolates, turkeys, bottles of standard wine and other small tokens of appreciation) are tax free. Where gifts become more significant they need to be declared on a P11D as a benefit in kind or included in a PAYE settlement agreement. Currently there is no statutory definition of minimal, although a deminimus level of £50 per employee has been mooted in the past and is expected to be included in legislation in the near future.

4. Gifts from suppliers

Some suppliers may wish to make Christmas gifts to employees they work with - provided these are below £250 in value, they do not need to be declared on a tax return. Although the vast majority of gifts are genuine and exchanged between employees and business contacts as a token of appreciation, care should be taken to ensure a gift cannot be misinterpreted as bribery which will contravene the UK’s Bribery Act.

Other tax efficient gifts

1. Tax free lump sums

Cash gifts are potentially exempt transfers for inheritance tax purposes and fall outside the donor’s estate completely after 7 years. Aside from this 7 year rule, all individuals are able to make gifts of up to £3,000 in value each tax year, which fall outside their estate immediately. If this £3,000 limit has not been used in the previous year, it can be carried forward for one year only, so that gifts of up to £6,000 can be made in the current tax year.

Gifts between spouses who are domiciled in the UK are covered by the spouse exemption and are completely exempt from inheritance tax. If one partner is non-UK domiciled, there are restrictions and advice should be taken.

To be really tax efficient, you could consider gifting a tax lump sum, for example, £3,000 (or £6,000 if you have not used last year’s exemption)to a family member, who could then invest it in an ISA. A wide range of new ISAs are now available into which up to £15,240 can be saved each year, including the much publicised Help to Buy ISA.

2. Charitable donations

Gifts to UK-registered charities, museums, universities, amateur sports clubs, political parties and organisations like the National Trust are tax exempt. If you donate through gift aid it is important to ensure that the tax you pay each year is greater than the amount you have donated, or you will be obliged to make up any shortfall personally.

Which gifts are not tax efficient?

1. You can’t claim tax relief for client entertaining

Client entertaining is not tax deductible and so, if you decide to say thank you to customers with a Christmas meal, be aware that it is not an allowable expense for tax purposes. Additionally, as explained above, any VAT incurred is not recoverable.

2. Cash gifts taxed as income

Cash gifts or bonuses given to employees are taxable, regardless of how insignificant they may seem. If you give your employees a cash bonus or the equivalent sum in retail vouchers, it will attract tax.

If you would like to discuss tax planning strategies in the run up to April 2016 please contact Lesley Stalker by emailing las@rjp.co.uk.