Avoid an expensive hangover after your staff party! A tax guide to what you can offer to spread some festive cheer

It’s Christmas party season once again! But with the black cloud of the Employer NIC rise looming menacingly on the horizon many companies will be trying to keep the costs of the office festivities down without being labelled a Scrooge by their hard-working staff. Avoiding an unnecessary and potentially expensive tax bill on what you provide is one way you can keep costs down without necessarily scaling back on what Santa gives to employees.

Here is a reminder of the relevant rules to consider when planning your Christmas event and/or gifts to help you avoid any tax hangovers going into the festive period.

The annual Christmas function

The cost of putting on an annual function for employees is usually exempt from income tax and NICs, so long as all employees (or all employees in a specific office or team location) are invited and the total cost per person that attends is less than £150 (inclusive of VAT).

There is also an option to put on more than one event for employees, provided that both events are annual in nature (for example, a summer barbeque and a Christmas party), open to all employees, and that the combined costs do not exceed £150 per head (including VAT) per tax year.

If the combined costs of all annual events in a tax year do exceed £150 (including VAT), the employer can choose to which event or events the exemption will apply. The £150 per tax year is not an allowance which can be offset against the total cost of all events per employee – it is an exemption for the cost of an event itself (so the cost of a single event is either wholly taxable or not taxable on a per employee basis).

Gifts to employees

Employers can provide low value gifts to employees without incurring tax or NICs if the trivial benefit exemption applies.

The trivial benefit exemption is allowed where the value of the gift does not exceed £50 (including VAT and any delivery costs), and is not cash or a voucher which can be exchanged for cash. Other stipulations are that it is not provided under the terms of a contract with the employee, nor as a reward or in recognition of the duties the employee performs.

So employers can give their staff hampers, bottles of wine, gift vouchers (so long as they can’t be redeemed for cash) or any other gift up to the value of £50 as a Christmas gesture – and the trivial benefit exemption should apply.

It is fine to provide gifts and also put on a separate Christmas party, providing the respective limits are adhered to, making them both exempt from tax.

But beware: employers should not give their employees a gift at the Christmas party itself. If this happens the value of the gift will be treated as part of the party cost per head and may push the total costs over the £150 per person limit. Then neither the gift nor the party will be exempt.

A painful hangover if you go a little excessive

For most companies the cost per head of the employee Christmas party is well within £150 and so the event is exempt from taxation. But what happens if you exceed the £150 limit, either knowingly or un-knowingly? What’s it going to cost you and how do you report it?

Some companies may have had exceptional results this year and have chosen to book a lavish event for which the charge per head easily exceeds £150 (so tax is expected on the party costs). However, some companies may expect the party costs to be exempt but unknowingly exceed the £150 per person limit resulting in the whole of the cost of the party being taxable. 

There are a number of common reasons which cause companies to unexpectedly exceed the £150 pp limit. These include:

1. Not including the cost of taxis to/from the event, or any overnight hotels for employees, in the cost of the party.
2. Not including the VAT in the cost of the party.
3. Poor attendance on the day (remember it is the cost per person in attendance that is used, so if few people attend then the cost per person will higher).
4. The additional bar bills from the directors’ credit cards (or other staff members) that were put behind the bar at the venue (and after-party locations) and subsequently reimbursed via expenses but not included in the overall cost of the party (this is most frequently seen).
5. Extra gifts given at the event considered separate to the party costs.

The list goes on …..

Whether the tax bill on the employee Christmas party is known about in advance or comes as an unwelcome surprise, that bill is an even more painful headache than the one most experience the morning after the party itself.

In the first instance, the per person cost of the party is a taxable benefit for the employee and reportable on their form P11D.

However, I am sure we can all imagine the reaction from employees when they receive the letter for HMRC stating they owe tax for the year on the staff Christmas party they attended!!  For that reason almost all employers choose to pay the tax on behalf of their employees and they do this by reporting the cost of the not-exempt party on their PAYE Settlement Agreement (PSA) for the tax year.

One of the main features of the PSA calculation is the ability to pay the tax due on certain benefits on behalf of employees. This however is a costly exercise for employers due to the required “gross up” to account the for tax on tax element in the calculation.

Below is an illustration of the potential costs an employer may face by exceeding the £150 limit by just a few pounds.

As you can see, just one extra drink over the exemption limit and the cost of the party becomes eye-watering and highlights why controlling the additional spend at and after the party is so important.

Most companies should have a PSA agreed with HMRC already and this is likely to include staff entertainment as an agreed benefit that can be included in your PSA calculation. If staff entertainment is not included then a PSA can be updated by contacting HMRC before July 6th following the end of the tax year.

For companies that don’t have a PSA already agreed then we will be publishing a further insight covering these agreements in the coming weeks so keep an eye out for that.

If you have any questions regarding the exemptions for annual staff events, trivial benefits or would like to discuss how to get the best value out from your employee benefits overall, then please do get in contact as we would be delighted to speak to you.