It is nearly Christmas. We are a professional tax body. Accordingly, we and our members feel obliged to remind employers how to make sure that their Christmas party doesn’t create unexpected tax liabilities for their staff.
A Christmas party, or in fact any annual function provided to staff, has the potential to be a taxable benefit in kind for the staff who attend. Fortunately, provided that a few conditions are met, such functions can qualify as a tax-free benefit for your staff, as well being a tax-deductible cost for you, the employer.
To meet the tax-free criteria:
- The party must be annual – one-off functions to celebrate the 25th anniversary of the firm, say, cannot qualify. But a recurring Christmas party, or equally a regular summer function, would meet the test.
- The event must be available to all employees - or all employees at specific location if the employer has multiple sites. It is also possible to hold events by department, as long as all staff at that site have the opportunity to attend one of the events. If the event is only for selected staff so that the general exemption cannot apply, then it might be worth considering if the trivial benefits rules might apply instead.
- The cost per head does not exceed £150 – of which more below.
The cost per head – one event per year
If an employer only holds one party in the year, then it is necessary to establish the total cost of providing:
- The party or function, and
- Any transport or accommodation provided for those attending (including non-employees) and
- Any related VAT on the costs of the above.
This is then divided by the number of people attending to establish the cost per head. Any non-employees, such as spouses or partners of employees, who attend can be included in the headcount.
Provided the cost per head comes to £150 or less, then the party will be exempt. If the cost is £151 per head or more, then the event will be a taxable benefit in kind for staff. The £150 is an exemption, not an allowance, and if it is exceeded, then the whole cost is taxable.
Where the cost exceeds £150 the benefit must be reported on a P11D for the attending employees. The employee’s benefit must also include the cost of any attending spouse/partner who is not an employee in their own right. The employer must pay Class 1A following the end of the tax year. Alternatively, the employer can bear the tax themselves by reporting the benefit on a PAYE Settlement Agreement.
The cost per head – two or more annual events
Where an employer holds more than one annual event, for example a Christmas party and a summer function, it is possible for more than one event to be exempt provided that when the cost per head of each event is added together the total is less than £150. For example, a Christmas party costing £75 per head together with a summer event of £50 per head come to less than £150 per head and would both be exempt.
If the employer holds a third event for £45 a head in the autumn, then the three events combined at £170 would be over the limit. In this case the employer is permitted to allocate the exemption to the Christmas and summer party, and only the autumn event would be taxable. In that case, consideration should be given to whether the trivial benefit rules might apply if the cost of any additional event is under £50/head.