With Christmas around the corner, employers will be thinking about the staff Christmas party and what gifts they may give to their employees. Considering whether any taxable benefits arise on these will be standard practice for most employers – read more in our guide.
However, an area that often gets overlooked is whether there are any tax implications for employers relating to gifts provided to their employees by a third party. The third party could be a client, a customer or a supplier and the gift could be anything from a bottle of wine to being invited to an overseas entertaining event.
Third party gifts to employees can create tax implications for the provider of the benefit, the employer of the employee receiving the benefit and the employee. Communication between the provider and the employer is often required to determine the correct tax, NIC and reporting requirements.
The tax treatment of such benefits depends on what form the benefit takes, eg cash, a voucher exchangeable for cash or goods, or a non-cash gift.
Where a third party employee is provided with cash, vouchers exchangeable for cash, or items which can be surrendered for cash, the provider must deduct tax under PAYE. Third party cash awards also create a liability for employer’s and employee’s Class 1 NIC (and possibly also the Apprenticeship Levy). Where Class 1 NIC is payable, it is the employer, not the provider of the gift, who must pay it.
To enable the Class 1 NIC to be declared to HMRC, the employer must process the amount via the payroll. The amount to be included in the payroll is the combined value of the payment and the PAYE paid by the provider.
Small gifts given by a third party may be exempt from tax and NIC if all the following conditions are met:
- The gift consists of goods or a voucher that are not exchangeable for cash
- The third party making the gift is not the employer or a person connected with the employer
- The gift is not made in recognition of, or in anticipation of, the performance of particular employment services
- The gift has not been directly or indirectly procured by the employer or by a person connected with the employer
- The total cost of all gifts made by the provider to the employee, or to members of the employee’s family, during the tax year is £250 or less (inclusive of VAT).
If the gift does not meet these five conditions, unless it has been arranged by the employer, it will be the responsibility of the provider to make an annual report of all third party gifts provided. The provider will be liable to pay and declare any Class 1A NIC due (Class 1 NIC may be due in some cases). Any tax due on the gift will be the liability of the recipient employee, although the provider may wish to settle the tax on behalf of the individual by entering into a taxed award scheme with HMRC. This is a similar arrangement to a PAYE settlement agreement (PSA).
If the benefit does not qualify for the small gifts exemption and has been arranged by the employer, it will be treated for tax purposes as if it was procured by the employer and provided directly to their employee. In such a case, it would be the employer’s responsibility to report the gift on form P11D and pay the Class 1A NIC. The provider will still be required to account for the PAYE tax due. Employers should, therefore, ensure that they are aware of gifts made to their employees so they can fully comply with their tax and NIC reporting obligations.
For more information on the tax treatment of gifts to employees please get in touch with your usual BDO contact or one of our Employment Tax specialists.
Employer Essentials Index