Feature – Tax on Christmas gifts for staff

In summary
The days of the Christmas bonus nestling in your December pay cheque seem to be fading, and employers are turning to more creative ideas for seasonal gifts for staff. Diverse workforces mean that dishing out champagne or turkey may not be suitable, and these may also attract the attention of the taxman. Vouchers are becoming more popular, as they allow staff to select the gift they would like.
Case study: Glenmorangie

Article in full
There’s a day in August when Marks & Spencer feels it is necessary to shake up its sandwich selections to accommodate a large number of mince pies. Mince pies decked in Christmas wrapping, of course.

While the majority scoff at this drive to see Santa while we’re still wearing shorts and sandals, many HR departments have to act in a similar vein to the high street retailer; knee deep in Christmas gift ideas in mid summer to keep their workers happy come December.

Martin Cooper, head of marketing at gift providers Cottrills, says that the Christmas gift is more prevalent in certain industries such as financial services and law firms. However, this is often determined by the individual culture of the company. “A lot of companies do do something and it’s almost become a necessary evil; their employees are expecting something and would be upset if they didn’t receive something.”

Organisations are having to think about such schemes as early as August and September to ensure that the gift they decide on lands on their employees’ desks or doormats before December 25.

Organisations that offer Christmas incentives one year are also in a dangerous position if they do not carry on this tradition. Cooper says the catch-22 is that employers have to spend the money to provide a gift because they always have done and to offer nothing would be morale busting, but often such gifts are perceived as low value.

And providing a gift can be a laborious task. Not only must it be done in plenty of time, a suitable gift must be chosen and HR teams must also make sure they’ve got jiffy bags and stamps ready to deliver the goods.

But choosing the gift itself can be the trickiest part of the Christmas experience. A vast array of gift providers wrangle for a share of the market, which means employers are inundated with ideas; ranging from the glamorous to the absurd. And the scope of the present varies greatly between organisations.

For example, last year employees at one of the world’s largest record companies were each afforded a brand new Ipod, while producers on a successful female- presented daytime talk show in the UK were given a 40g bar of Dairy Milk.

Traditionally employees receive gifts such as hampers or turkeys as a thank you for their hard work during the year. For instance, Ikon Office Solutions sent all employees a hamper last year with a signed note by the company directors.

Turkeys are often given to employees in more traditional industrial sectors.

Engineering firm Mitutoyo had been giving staff turkeys for the past 23 years, as part of their festive bonus. However, last Christmas it was hit with a £6,000 charge from the Inland Revenue, claiming back taxes. Martin Weeks, director of the company, said he was shocked that following a routine Inland Revenue inspection he was charged £17 a bird because the turkeys were a benefit-in-kind. Luckily, after complaining he was refunded the charge.

Ambiguous Inland Revenue rules regarding the value of taxable gifts means that employers must even watch out what they offer when it comes to the turkey. Lesley Fidler, senior manager in tax firm Baker Tilly’s employer consulting group, explains that the level of tax could even depend on the size and quality of the bird.

This highlights the fact that turkeys are no longer the easiest gift to give.

More employers are now offering employees a choice of present. Tracey Aslam, head of incentive business at gift voucher provider Kingfisher, which offers vouchers for Woolworths and B&Q, says that an increasing number of firms are giving staff gift vouchers that they can spend in a variety of shops. She says that where cash bonuses are fairly low, they are being replaced by vouchers, which allows employees to spend them on a treat rather than the gas bill.

Choice is a common theme when it comes to this year’s gift ideas. Chartered accountancy firm Cassons decided to introduce a Christmas gift that staff could choose themselves. Nicola Nuttall, HR manager, says that it previously offered a cash bonus to staff, which was easy to co-ordinate. But it thought that this lacked imagination so it decided to set a budget of £60 per employee and offer staff the chance to choose their own gift from a range of items.

The Christmas gift is also seeing a resurgence because fewer organisations are offering bonuses during the festive season. Research by the Chartered Management Institute shows that almost 80% of employers no longer offer such a cash bonus.

While this number varies from year to year and is down to other factors such as the current financial climate, it allows employers to combat any lows by being more creative when it comes to Christmas offerings. Karen Charlesworth, head of research at the Chartered Management Institute, says that despite Christmas only coming once a year, it should be regularly planned for.

And how well it is planned for can be crucial. Employees do not appreciate benefits such cheap chocolates, items with corporate branding or share options that become worthless in the first week of the new year. Imaginative gifts are much more appreciated.

Employers can also no longer unequivocally offer booze or meat as a gift because of the increasingly diverse nature of UK workforces. Employers must now make sure that all of their employees are considered; for instance, Muslims don’t drink alcohol thus rendering a bottle of champers for everyone redundant.

Baker Tilley’s Fidler says the most important thing for employers to consider is that their intended generosity is not hampered by unnecessary claims by the taxman. While big corporate firms invest enough in compliance to ensure that this will not be much of an issue, smaller and medium sized firms should be especially wary of spreading too much festive joy in the form of gifts.

Txable gifts
Organisations must watch out that their goodwill in providing Christmas gifts is not hindered by the taxman.

Employers should make sure they set up a PAYE Settlement Agreement to help staff avoid paying tax or NI contributions on any non-cash gifts such as turkeys, hampers or gift vouchers. This can be done by writing to the local tax office and providing a list of staff, how much they earn and what gift they are receiving.

But if an organisation does not set up such an agreement, the rules of taxing such gifts is split in two; one rule for those that earn less than £8,500 and another for those earning over this. Those earning under £8,500, predominantly part-time employees, are taxed on the second hand value of the gift, which needs to be entered on the employee’s year end return. Thus to take greatest advantage of such tax rules, employers should gift things with no second hand value such as alcohol or perishables.

The Revenue has also instructed its tax offices to ignore small gifts, although its definition of small has not been clarified. While this is down to an employer’s local tax officer, the figure of £25 is commonly regarded as the limit.

For staff that earn more than £8,500, the actual cost of the gift must be included on their tax return.

Case study
Whisky distiller Glenmorangie has always given its employees a Christmas treat but over the past few years it has shaken up the type of gift. Ian Drysdale, HR director, says that as a traditional Scottish distillery the company had also been quite traditional with gifts. “We’ve given employees something at Christmas for a number of years. In the past, being in the whisky industry, we’ve always given them a booze pack, which always comes in quite nice at Christmas.”

It had also provided staff with high street gift vouchers from stores such as Marks & Spencer and Safeway, but last year decided to change this. It worked with gift providers Cottrills to offer a brochure to its 355 permanent employees, as well as its pensioners, where staff could choose up to £30 worth of gifts.

“When you make a change some people like it, some people don’t,” says Drysdale.

Some of the guys said ‘now I’m going to have to buy £25 worth of Marks & Spencer vouchers to give to my wife because I always put them in her stocking and she thought that was a great present’. And some missed the booze pack but I think we felt we’d been quite traditional so we wanted to break that tradition and it is quite nice to ring the changes occasionally.”