The taxman is not entirely lacking in Christmas spirit and the tax system features a number of exemptions which enable employers to put on a party for staff or to give employees a seasonal gift without triggering an unwanted tax liability. However, the taxman’s generosity is limited, and the message here is to keep it modest.
Staff Christmas parties
Although there is no specific exemption for Christmas parties, there is one for annual parties and functions and it is this exemption which provides the opportunity for staff – and their guests – to enjoy a Christmas party without being hit with tax charge once the decorations have been packed away. As with all exemptions, availability is contingent on the associated conditions being met.
Function must be an annual function
As far as the tax exemption is concerned, not all functions are equal. The tax exemption only applies to annual parties and functions. Consequently, if you hold a staff Christmas party every year, it is possible to take advantage of the exemption to keep it tax-free. However, if the 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.
Exempt amount capped at £150 per head
The exemption only applies to an annual function if the cost per head is £150 or less including VAT. This is simply the total cost of the function divided by the total number of people attending, including both employees and any guests. If accommodation or transport is also provided, these are taken into account in working out the total cost of the function. VAT is also included, even if this is subsequently recovered where the employer is VAT-registered.
If there is only 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.
Exceeding the £150 per head limit
The £150 per head figure is an exemption not an allowance and if the cost of the 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. The employer will also face a Class 1A National Insurance charge where the provision of the party is taxable on employees as a benefit in kind.
Going slightly over the £150 cost per head limit can be expensive – there is no tax or employer-only Class 1A National Insurance 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 to keep a close eye on the costs.
More than one annual function
Where there is more than one annual function in the year, the exemption can be allocated in such a way as to minimises the overall tax bill. Annual functions will all be tax-free as long as the total cost of all the functions is not more than £150 per head. For example, if a company holds 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 functions is more than £150, the exemption can cover whole functions in such a way as to give the best result. For example, if there are 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 functions but not to others. In the last example, if the 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 the 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 doing the sums.
Consider a PSA
If a taxable benefit arises in respect of the staff Christmas party, either because the function is not an annual function or because the cost per head figure exceeds the £150 exempt limit, consider using a PAYE Settlement Agreement (PSA) to settle the tax liability on behalf of your employees to preserve the goodwill gesture. A PSA is an agreement with the tax inspector under which the employer pays the tax and associated National Insurance on behalf of their employees. Information on using a PSA can be found online.
Deduct the cost in computing profits
The general prohibition on tax deductions for entertainment expenses does not apply to staff entertaining. Consequently, the costs of holding a staff Christmas party can be deducted in computing the employer’s taxable business profits.
At Christmas, businesses may wish to show their appreciation by making gifts to staff and to customers and suppliers. The rules on gifts can be quite complicated and it is important to understand when a tax charge may arise on the recipient and what the business can deduct when computing its profits.
It is possible to give staff small seasonal gifts without triggering an associated tax charge. Typical gifts would 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 employees to enjoy small non-cash benefits costing not more than £50. Unless the employee is a director of a close company, there is no limit on the number of tax-free gifts of £50 and under that an employee can enjoy each year; for close company directors, there is a £300 annual limit.
There are conditions which must be met for the exemption to apply. The 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, the 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.
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 the 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, the employer could consider using a PSA to meet the liability on behalf of the employees.
As with staff parties, the employer can deduct the cost of staff gifts when computing their taxable profits.
Gifts to third parties
It is 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 the third parties are deemed to be entertaining in respect of which a tax deduction is denied. There is however a workaround – the 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 the business rather than a bottle of wine.
Keeping it tax-free
To keep Christmas parties and seasonal gifts tax-free, the trick it to keep it small and make use of the available exemptions. Plan ahead and make sure that the cost figures do not creep up.