Did you know that the taxman is not entirely lacking in Christmas spirit? If you are an employer, the tax system features a number of exemptions which enable you to put on a party for staff or to give your employees a seasonal gift, without triggering an unwanted tax liability. However, you should also know that the taxman’s generosity is limited, and the message here is to keep it modest.
When considering Christmas staff parties, you should take into account that there is no specific exemption, but there is one for annual parties and functions and it is this exemption which provides the opportunity for your staff – and their guests – to enjoy a Christmas party, without being hit with tax charge once the decorations have been packed away. In addition, as with all exemptions, availability is contingent on the associated conditions being met.
And when it comes to tax exemption, you need to be aware that not all functions are equal. The tax exemption only applies to your annual parties and functions. Consequently, if you hold a staff Christmas party every year, you could take advantage of the exemption to keep it tax-free. However, if your Christmas party is not a regular occurrence and you decide to hold a party for staff this year as a one-off, for example to celebrate a successful year, the exemption will not apply and your employees will be taxed on the resulting benefit in kind.
On top of that, the exemption only applies to your annual function if the cost per head is £150 or less including VAT. This is simply the total cost of your function divided by the total number of people attending, including both employees and any guests. If you also provide accommodation or transport, you also need to know that these are taken into account in working out the total cost of your function. VAT is also included, even if this is subsequently recovered where you are VAT-registered. If you only hold one annual function in the tax year, it will be tax and National Insurance free, as long as the cost per head figure is not more than £150.
To add to that, the £150 per head figure is an exemption not an allowance, and if the cost of your function is more than £150 per head, the total amount is taxable, not just the excess over £150. This means that if the cost per head is £155 per head, an employee attending alone would be treated as receiving a taxable benefit, with a taxable value of £155. Where an employee attends with a partner, the employee is taxed on their partner’s attendance too – in this case the taxable benefit would be £310. You will also face a Class 1A National Insurance charge where the provision of your party is taxable on employees, as a benefit in kind. So bear in mind that going slightly over the £150 cost per head limit can be expensive – and that there is no tax or employer-only Class 1A National Insurance for you to pay for an annual party where the cost per head is £149; however, the story is very different if it creeps up to £151 per head. The moral here is for you to keep a close eye on your costs.
Where you hold more than one annual function in the year, the exemption can be allocated in such a way as to minimise the overall tax bill. Your annual functions will all be tax-free, as long as the total cost of all your functions is not more than £150 per head. For example, if you were to hold an annual Christmas party costing £50 per head and a summer barbecue costing £40 per head, both will remain tax free as the total cost per head figure of £90 is less than the permitted £150. If the total cost of all your functions is more than £150, the exemption can cover whole functions in such a way as to give the best result. For example, if you hold three annual functions costing respectively, £70 per head, £60 per head and £40 per head, at first sight the exemption is best applied to the £70 and £60 functions (a total cost of £130 per head). The remaining £20 is lost, as it cannot be set against the £40 per head function – only whole functions can qualify for the exemption. The best result may be different if guests are invited to some of your functions, but not to others. In the last example, if your employees bring a guest to the £40 function, the exemption is best utilised against the £70 and £40 per head events. Leaving the £40 function in charge will mean that your employee suffers a taxable benefit of £80 (£40 for the employee and £40 for their guest); leaving the £60 function in charge reduces the total taxable benefit to £60. There is no substitute for you doing the sums.
Another thing, if a taxable benefit arises in respect of your staff Christmas party, either because the function is not an annual function or because the cost per head figure exceeds the £150 exempt limit, you could consider using a PAYE Settlement Agreement (PSA) to settle the tax liability on behalf of your employees, to preserve your goodwill gesture. A PSA is an agreement with the tax inspector under which you pay the tax and associated National Insurance on behalf of your employees. If you want to know more about this, information on using a PSA can be found online.
The general prohibition on tax deductions for entertainment expenses does not apply to staff entertaining. Consequently, the costs of holding your staff Christmas party can be deducted in computing the employer’s taxable business profits.
At Christmas, you may wish to show your appreciation by making gifts to your staff, customers and suppliers. The rules on gifts can be quite complicated and it is important you understand when a tax charge may arise on the recipient, and what you can deduct when computing its profits.
It is possible to give your staff small seasonal gifts, without triggering an associated tax charge. Your typical gifts could include a bottle of wine, a small hamper, a box of chocolates and suchlike. The relevant exemption here is the one for trivial benefits, which enables your employees to enjoy small non-cash benefits, costing no more than £50. Unless your employee is a director of a close company, there is no limit on the number of tax-free gifts of £50 and under, that your employee can enjoy each year; for close company directors, there is a £300 annual limit. You should be aware that there are conditions which must be met for the exemption to apply, though. Your gifts must not be in cash or in the form of a cash voucher and it must cost you £50 or less to provide. Further, your gift cannot be reward for services, and there must be no contractual obligation to provide it. Keeping seasonal gifts within the trivial benefits exemption will prevent a tax charge from arising. Detailed guidance on the trivial benefits exemption can be found in HMRC’s Employment Income Manual. Be aware that cash gifts and cash vouchers are liable to PAYE and employer and employee National Insurance. If a tax liability does arise, for example because the cost is more than £50, it will be taxed on your employee, as a benefit in kind, and will need to be reported to HMRC on the employee’s P11D. An employer-only Class 1A National Insurance liability will also arise. Again, you could consider using a PSA, to meet the liability on behalf of your employees. As with staff parties, you can deduct the cost of staff gifts, when computing their taxable profits.
You’re probably familiar with the fact that it’s also traditional at Christmas to give a small gift to key customers and suppliers as a ‘thank you’. However, the rules here are harsh; gifts to third parties are deemed to be entertaining, in respect of which a tax deduction is denied. There is however a workaround – your gift will be tax deductible if the cost does not exceed £50 per person per tax year, and it features a conspicuous advert for the business. In addition, it cannot be food, drink or tobacco (or a voucher exchangeable for food, drink or tobacco). Consequently, to benefit from a deduction for gifts to third parties, go for a business diary or a pen featuring an advert for your business, rather than a bottle of wine.
To keep your Christmas parties and seasonal gifts tax-free, the trick is for you to keep it small and make use of the available exemptions. Plan ahead and make sure that the cost figures do not creep up.
Lotuswise Chartered Accountants and Business Consultants can support your business with the complexities of these tax and payment rules and help you succeed. To find out how, please contact us. To also get even more useful business and finance information and tax advice tips, check out our app on Google or Apple stores.
Watch the video here.