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Unwrapping tax implications of Christmas parties
As we enter the office festive party season, Blick Rothenberg director Robert Salter reviews what perks employers can provide to their staff and the tax conditions of such benefits
Illustration: Jackie Parsons
Q Employers can get a tax break for hosting Christmas parties. Is there a catch?
Employers can provide their employees with a Christmas party on a tax-free basis in the first instance. This tax-free status, however, is subject to a number of conditions, which employers may often not be aware of and can, if not followed, create a very significant tax liability for the business.
For example, tax-free staff entertaining for ‘annual events’ (e.g. Christmas or summer parties) is subject to an annual limit of £150 per person attending, per tax year. The £150 is the VAT-inclusive cost and if this limit for that annual event is exceeded, the whole amount of the event becomes a taxable benefit (i.e. not just the excess above the £150 threshold).
It is also important to realise that the total cost of the event needs to be considered when assessing whether the £150 per person threshold has been exceeded or not. That means one can’t just consider the costs of hiring the venue and the food bill, for example, but any drinks provided and ancillary costs (e.g. staff taxi fares or hotel accommodation) also need to be included.
Other key conditions that employers need to be aware of include the fact that the £150 per person limit applies to all annual events that the employer provides for its employees in a particular tax year. As such, if the employer arranges both a summer party and a Christmas party, the £150 limit needs to be considered on a cumulative basis over the two events. However, if one event costs £100 per person and the other event costs £120 per person, the employer can still claim the £120 event as tax-free. The remaining event, however, would be fully taxable in this scenario.
If the £150 per person threshold is exceeded, the employers can, in principle, report the taxable value on the individual employees’ P11D forms.
Q Do all staff need to be involved? What if a business is too big or has several locations?
It is also important for employers to recognise that the annual events need to be available to all employees, rather than just a select group of staff. However, fortunately for larger employers with many departments or locations, HMRC recognises that the different teams and offices might need to have their Christmas parties as individually organised, separate events and still accept that the events are available, in effect, to all employees.
If the £150 per person threshold is exceeded, the employers can, in principle, report the taxable value on the individual employees’ P11D forms, so that the employee bears the tax cost of the benefit. However, as this approach is realistically inappropriate from an HR and staff morale perspective, the great majority of employers will cover the tax and NIC liability directly via a PAYE Settlement Agreement (PSA) with HMRC.
While a PSA makes good sense from an HR and staff morale perspective, it is important for employers to realise that a PSA is not a cheap option. This is on the basis that when agreeing to a PSA with HMRC, the employer agrees to cover the core income tax due, the employee and employer NICs, and the relevant tax gross-up. While the effective cost of a PSA will depend upon the exact page structure of each employer (i.e. how many people are taxable at 20%, 40% and 45% if the employer is based in England, Wales or Northern Ireland), for a typical employer the PSA costs could often add 70% to the effective cost of the event. Hence, a Christmas party with an overall per head cost of £200 covering the venue hire, meals, drinks and the like could easily cost around £340 per head, once PSA costs are included. For employers with a high level of employees being taxable at 45%, the overall PSA-related ‘tax costs’ would be considerably greater.
It is also important for employers in Scotland, or for businesses in the rest of the UK with employees north of the border, that the costs of a PSA for Scottish-based staff will actually be slightly higher. This is because the PSA calculations should recognise the higher income tax rates that apply, in most cases, for employees in Scotland compared to the rest of the UK.
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Q Are there any other points to consider?
One option for employers who are looking to avoid the costs of a PSA would be to hold the Christmas party in January or February rather than December. That way, it would still qualify as an annual event and be eligible for the £150 per head tax-free treatment, but you will probably find that the costs of organising the event (venue hire etc) are considerably cheaper. However, you might find that employees prefer to have their Christmas party before the festive holiday.
It is also worth remembering that the Christmas party is not the only ‘seasonal benefit’ that employers can provide in the run-up to Christmas. Specifically, under the ‘trivial benefit’ rules, employers can provide their employees with a hamper of Christmas goodies, for example, on a tax-free basis, providing this gift has a value of no more than £50. Again, this cost is the VAT-inclusive cost of the hamper. In addition, even in the case of Christmas hampers, it is important for employers to avoid inadvertently falling foul of any tax traps such as including vouchers or cash within the gifts.
As experience indicates that many employers are not fully aware of the rules that can apply to Christmas parties and staff hampers, it is important that advisers make sure their clients are informed to ensure that Christmas is a time of joy – and not tax-induced stress.
