Christmas party without the bah-humbug
As we enter the season of Christmas parties and gift giving, it is important to keep the tax office off the guest list by ensuring that employers are aware of how to avoid any tax consequences on such staff parties and gifts.
Providing certain conditions are met, both employer and employees will not be liable for tax and national insurance contributions (NIC) on staff parties and gifts provided at Christmas time.
Staff party – Annual function exemption
Annual functions such as those at Christmas time which are generally open to all employees (they don’t have to attend but they do have the option to), and which cost no more than £150 per head are not taxable.
Where it is not practical or possible for an employer to hold a single function (for example, where they have several sites), the exemption can still apply across separate locations and departments.
The £150 exemption is based on the cost per attendee (including non-employee guests) and is calculated by taking the total cost of the function (including VAT), the cost of any transport and accommodation provided and dividing this total by the number of attendees.
If the cost per head is £150 or less, then it will fall within the exemption. If the cost does exceed £150, then for those employees who attended, a benefit-in-kind is deemed to have been provided and the amount will need to be reported on form P11D. The employer will also then be liable for Class 1A NIC on the value of the benefit provided.
Alternatively, if the employer does not want the employee to suffer the tax due, they can approach HMRC to arrange for the function to be included in a PAYE Settlement Agreement (PSA).
Given the current climate, it is likely that, as with last year, many businesses may well be looking to hold their Christmas parties virtually rather than in person.
If the party is held virtually and meets all the other conditions, it will still fall within the exemption.
Exemption not an allowance
It is important to remember that the £150 exemption limit is not an allowance to set against an amount that exceeds the limit. If the party costs £160 per head, then the full amount is a taxable benefit and not just the £10 which exceeds the exemption limit.
More than one annual function
If there is more than one annual event provided in the year (for example, a summer barbecue and a Christmas party) and the combined cost per head is £150 or less, then both events could be covered by the exemption.
However, if the combined cost is more than £150 then the employer must decide how best to use the exemption. For example, there are two annual functions – one costing £90 per head and one £120 per head, so both are below £150 per event but the combined total is £210 per head. Therefore, only one event will qualify for the exemption, and you would expect the employer to choose the more expensive one, meaning the lower one would need to be reported to HMRC either via the P11D process or through the PSA route.
If other social functions are provided and these do not fall within the annual function exemption, then the cost per head of each function will be taxable and the details will need to be reported to HMRC accordingly. In this instance, employers could consider whether the trivial benefits exemption might apply.
Christmas gift – Trivial benefits exemption
Employers who look to provide their employees with a gift at Christmas time can do so tax free, providing the conditions for the trivial benefits exemption are met.
To qualify for the exemption, the following must apply:
- The cost of providing the benefit does not exceed £50
- The benefit must not be cash or a voucher exchangeable for cash
- The benefit must not be provided via a salary sacrifice arrangement or other contractual arrangement
- The benefit provided must not be provided in recognition of services performed by the employee as part of their employment
It is generally accepted by HMRC that modest gifts provided to employees at Christmas time are within the exemption.
So, gifts such as a box of chocolates, bottle of wine/spirit or turkey provided to employees at Christmas, if the cost is £50 or less, would be deemed to be trivial. This would also include non-cash gift vouchers, such as those for high street chain retailers.
Similarly, as with the annual function exemption, if the full cost of the benefit exceeds £50, then the full amount is taxable, not just the amount that exceeds the £50 limit. The total benefit will then need to be reported to HMRC either via the P11D process or through the PSA route.
With regard to directors, office holders and their family, the maximum exemption limit regarding the total value of benefits that can be treated as exempt is £300 per tax year.
Interaction with other exemptions
It is worth remembering that the annual function exemption and trivial benefit exemption can work together as they are different exemptions. Therefore, a Christmas party with a cost per head of less than £150 per head plus a Christmas gift, such as wine or turkey, costing £50 or less can work.
As HMRC will always look to ensure that the appropriate tax treatment has been adopted, it is important that businesses maintain suitable records to show how the costs per head for a Christmas party and/or Christmas gift have been calculated in order to demonstrate that the exemption criteria have been met.
Failing to do so can leave both the employer and employee open to additional tax and NIC liabilities and what started off as a gesture of seasonal goodwill could end up being a case of festive bah-humbug.
The content of this article is for guidance only and shall not constitute advice. Please seek independent advice or contact GuildHUB for information about its services.