Avoiding a post party headache
Our Senior Tax Manager is explaining tax implications of Christmas parties for employees in her article for The Business Magazine below.
As is becoming apparent to anyone turning on their television only to be faced with endless pictures of Christmas Trees and Santa (Bah Humbug), it is again that time of year when employers treat their employees to the odd glass of mulled wine and Christmas cheer. The employer will of course receive tax relief for the costs of the staff Christmas party, but what are the tax implications for the recipient of such employer provided merriment?
£150 per head exemption
There is no specific tax free allowance in respect of the employer provided festive celebrations many of us will experience in the weeks to come, aka the Staff Christmas Party. However, if certain conditions are met (see below), an HM Revenue & Customs (HMRC) exemption of £150 per head for “annual events” is available. Provided the cost of the Christmas Party (including cost of venue hire, entertainment, transport, accommodation, food, drink and of course party poppers) does not exceed £150 per head (inclusive of VAT), no income tax charge will arise. Care is needed to ensure that the magic figure of £150 per head is not exceeded, even by a penny. If the costs per head exceed £150, no exemption will be available and the full cost of the function will become chargeable. The cost per head is calculated based upon the number of people attending the event, including non employees.
If the employer holds a number of functions during the year, no benefit in kind will arise provided the aggregate costs per head are less than £150. Where the exemption limit would be exceeded, the employer may choose which functions when taken in aggregate make best use of the exemption. Any functions that do not fall within the scope of the exemption, or those that result in the £150 limit being exceeded will be chargeable on the full cost per head, not just the excess over £150.
It is important to note that this exemption is specifically for “annual events” and is not intended to cover the odd lunch or coffee and iced bun that may be provided during the course of the tax year.
Conditions to be met:
- The event must be a regular event. One off events are not covered.
- The event must be open to all staff. If anyone is excluded, the exemption will not be available.
- Whilst non employees may attend, the event must be mainly for staff.
- Multiple locations are permitted – HMRC recognise that geographically it may not be possible to get all employees in one place at the same time.
- The event must not be a reward or bonus.
How about Christmas Gifts?
Being the season of goodwill, some employers may choose to give non cash gifts to their employees. If the value of the gift is not “trivial”, a benefit in kind will arise on the employee. Whilst HMRC have not provided a definition of trivial for these purposes, they will accept that a seasonal gift of an ordinary bottle of wine, a box of chocolates or a turkey will be “trivial” and as such no benefit will arise.
What happens if one too many drinks are had or party poppers popped? – PAYE Settlement Agreement to the rescue!
In circumstance where the cost of the staff party exceeds £150 per head, or where the exemption is not available, the recipient employee may be faced with an income tax charge as the benefit may need to be reported on a form P11D by the employer at the end of the tax year. As you can imagine, such a tax charge is unlikely to be motivating to an employee many months after the memories of Christmas Past have faded. However, all is not lost as an employer may seek to enter into a PAYE Settlement Agreement (PSA) with HMRC whereby the employer will agree to pay the income tax charge due on the employee’s behalf. Whilst entering into a PSA is more expensive for the employer (the employer will settle the tax on a “grossing up” basis and incur additional National Insurance costs), an employer may see this as a worthwhile expense given the goodwill that may be generated with the employee. Non trivial gifts may also be included within the PSA. It should be noted that the deadline for putting a PSA in place for 2014/2015 is 6 July 2015.
If you would like any advice concerning the provision of benefits in kind to your employees, or the possibility of entering into a PAYE Settlement Agreement, please do not hesitate to contact our Tax team on 01491579740.