Employee staff entertaining and gifts – taxable or not?

Employers need to ensure they are aware of the exemptions, the conditions that apply and the danger areas.

What is the background?

Cash Gifts

Employers are responsible for determining the tax and NI status of staff entertaining and gifts. Any gifts in the form of cash, such as a Christmas bonus, should be processed through the payroll and subjected to tax and NI.

Non-cash gifts

Any non-cash costs that are taxable should either be:

• Shown on an employee’s P11D (or payrolled); or
• Included on a PAYE Settlement Agreement (PSA).

Most employers include taxable costs on their PSA, whereby they pay the tax and NI that is due, rather than potentially demotivate their employees with an entry on their P11D leaving them facing a tax liability.

As the cost of processing something through a PSA is expensive for the employer (around 44% for a 20% employee and 92% for a 40% employee) it is vital that exemptions are used wherever possible.

What is the issue?

If an employer does not apply the correct tax treatment to staff entertaining and gifts they may face a substantial tax and NI liability, going back six tax years, along with interest and penalties and a potential enquiry from HMRC.

In broad terms, the two main exemptions available to an employer in relation to staff entertaining and gifts and the key conditions are as follows:

Annual Function Exemption

• The event must be an annual one;
• It must be provided to all employees; and
• The cost per head (inclusive of VAT) must not exceed £150.

Trivial Benefit Exemption

• The gift does not exceed £50 (inclusive of VAT) per employee;
• The gift is not cash or a cash voucher;
• The employee is not contractually entitled to the gift; and
• The gift is not a reward in recognition of an employee’s duties.

Special rules apply for small companies.

Danger areas

Some common danger areas include:

Establishing costs

• The total VAT inclusive cost must be established, even if the VAT has been reclaimed in full or in part, to ensure exemption limits have not been exceeded.
• Any linked gifts must be added together, for example, if an employer gives an employee a gift card which costs the employer £10 to provide, but the employer tops it up a further 7 times, the cost will be £80 and the trivial benefit exemption will not apply.

Determining who met the cost of the benefit

The trivial benefit exemption only applies if the employer meets the cost of the benefit. It does not apply to reimbursements. So, for example, the trivial benefit exemption will not apply if a manager buys a £30 bunch of flowers for an employee that has had a baby and is reimbursed for them.

Lack of information

If there is insufficient information to determine whether an exemption is due then it should not be applied.

Setting up a PSA, calculations and payment

The PSA deadlines must be met.

• A formal agreement needs to be in place with HMRC. The deadline for having one in place is 6 July after the end of the tax year in question (for 2025/26 the deadline is 6 July 2026). Once in place it remains in place for future years.
• Most agreements specify the employer’s calculations of the liability must be with HMRC by 31 July after the tax year end.
• The liability must be paid by 19 October after the tax year end (or 22 October if paying electronically).

What do employers need to consider?

Employers need to ensure they:

• Review and interrogate their finance ledgers to identify any items that need to be included on their PSA (or via P11Ds/payroll);
• Exclude those items that are eligible for a tax exemption and be able to explain their view to HMRC;
• Use appropriate tax rates for their calculations, including using devolved tax rates for example using Scottish Tax rates for any Scottish employees;
• Review earlier years to see if they have any issues; and
• Consider whether tax costs need to be recharged between different parts of the business.

How can UNW help?

Before choosing how to deal with their staff entertaining and gifts, employers need to ensure they are applying the correct tax exemptions and are not overpaying tax and NI. Our employment tax specialists have expertise in analysing expenses to identify taxable staff entertaining, gifts and agreeing PSAs with HMRC. They regularly undertake reviews for clients to ensure they are adopting the correct approach and are declaring the correct amounts on their PSA.

As well as helping employers to set up PSAs we also undertake annual PSA reviews which typically proceed as follows:

• Examination of appropriate finance ledgers;
• Identification of items potentially eligible for tax exemptions;
• Calculation of tax and NI liabilities; and
• Submission of the completed calculations to HMRC.

If you would like to discuss how we can help you, or have any other employment taxes related queries, please get in touch with us at employmenttaxesteam@unw.co.uk