With staff Christmas parties in full swing, is it just Santa companies need to think about, or the Scrooge of the Taxman too? Nigel Morris, tax director at MHA MacIntyre Hudson, explains.
The good news for employers is that HMRC provides an exemption for a staff Christmas party, as long as the event is annual, open to all employees and costs no more than £150 per head. For many employers this is quite straightforward and they will be well within the limits. But what if it’s not practical to hold a single function?
Fear not, HMRC has thought about that too, allowing the exemption to apply across separate locations and departments. For businesses with more than one office, an annual event that’s open to all staff based at one location still counts as exempt. Businesses can also put on separate parties for different departments, as long as all employees can attend one of them.
If an employer provides two or more annual parties or functions, no charge arises in respect of the party, or parties, if the costs per head don’t exceed £150 in aggregate. If it does go over £150, then whichever functions best utilise the £150 are exempt, and the others taxable.
It’s important to note that this is an exemption, not an allowance. Any functions outside the scope of the exemption are chargeable on the full cost per head, not just the excess over £150. The cost of the function includes VAT as well as transport and/or overnight accommodation if these are provided to enable employees to attend.
As well as a Christmas party, an employer may provide employees with a gift. Helpfully, there is also an exemption for trivial gifts, but there are some conditions.
“Firstly, the cost of providing the gift can’t exceed £50 (including VAT). If it does, the full amount is taxable, not just the excess over £50. Another rule is that the benefit is not cash or a cash voucher. There must also be no contractual entitlement to the gift or a gift provided as a reward. In addition, just because a gift is provided each year, or is provided to all staff members, it doesn’t mean that the employee has a contractual entitlement to it.
If any of the events an employer provides aren’t exempt, the costs must be reported to HMRC and National Insurance (NI) will be paid on them. This must either be reported on each employee’s P11D form , so the employee personally pays tax on the apportionment, and also detailed on the annual Class 1A NI return (P11D(b)), which is paid by the employer, or included in an annual PAYE Settlement Agreement (PSA), where tax and NIC is paid for by the employer on a grossed-up basis.
Finally, the event or gift must not be part of a salary sacrifice arrangement. If it is, the employer will have to report how much the social functions, parties or gifts are worth to each employee.