With Christmas just around the corner, we look at how employers can provide Christmas parties or gifts to employees without a tax headache to deal with after the event.
The Christmas party — and other annual functions
The Christmas party is generally an allowable expense for you as the employer and it can also be a tax-free benefit for the employees, as long as the below conditions are met:
- annual event – the event must happen once a year on a recurring basis. A one-off celebration, such as a party to mark a business anniversary, cannot qualify;
- open to all employees generally, or to all employees at a particular location where the employer operates from more than one site; and
- cost no more than £150 per head in total, including VAT and any associated costs such as transport to the venue or overnight accommodation provided to help employees attend. The £150 limit is not a per-event allowance, it is a single combined limit that applies across all annual functions held in the same tax year (see below for further details).
The £150 per head figure is worked out by dividing the total cost of the event by the total number of people who actually attend, not just employees, but also any partners or other guests. One trap to be aware of is that if some employees accept the invitation but do not attend on the night, the cost per head rises, which could push the event over the limit.
The £150 is not a tax-free allowance, it is an all-or-nothing threshold. If the cost per head exceeds £150, the full amount, not just the excess, becomes a taxable benefit for each employee who attends. Where an employee brings a guest, the cost attributable to that guest is also taxable on the employee.
The exemption also applies to virtual events held online, provided the other conditions are met and the total cost per head does not exceed £150.
More than one function in the same tax year
The £150 per head limit applies to all annual events combined in the same tax year, not to each event separately. Where an employer holds more than one qualifying annual function, it is possible to choose which event or events to bring within the exemption, provided their combined cost per head does not exceed £150.
Where the combined cost of all events exceeds £150 per head, the employer can select whichever combination of events makes the best use of the £150. It is not necessary to do this in the order the events took place. For example, if there are three annual events held at a cost of £75, £80 and £60 per head each, the latter two can be claimed as exempt but the first event will be taxable in full (it is not possible to just tax the excess over £150).
Any event not brought within the exemption is taxable in full on the attending employees.
Christmas gifts from the employer
A gift given by an employer to an employee is in principle a taxable benefit. However, the ‘trivial benefits’ exemption can apply where all of the following conditions are met:
- the cost of providing the gift to the individual employee does not exceed £50 (including VAT);
- the gift is not cash or a cash voucher (non-cash gift vouchers can qualify);
- the gift is not provided under a salary sacrifice arrangement or any other contractual obligation; and
- the gift is not given in recognition of, or in anticipation of, particular services the employee has performed or will perform.
Where the cost of a gift to an individual employee is not immediately obvious, for example, where a bulk order means individual items were not priced separately, the average cost per person can be used to determine whether the £50 limit is met.
If the cost of a gift exceeds £50, the entire cost is taxable, not just the amount above £50.
Cash bonuses paid at Christmas are taxable earnings in the usual way and must go through the payroll. The trivial benefits exemption can never apply to cash.
Where the employer is a close company, broadly, a company controlled by five or fewer shareholders, there is an annual cap of £300 on the total value of trivial benefits that can be provided tax-free to a director or other office holder (and to members of their family or household) in any one tax year. The usual £50 limit on each individual benefit still applies within that overall cap.
What happens when an exemption does not apply?
Where a party or gift falls outside these exemptions, the taxable benefit is normally reported on a form P11D and the employee pays income tax on it, with the employer also facing a National Insurance cost. As an alternative, employers can enter into a PAYE Settlement Agreement with HMRC, under which the employer pays the tax and National Insurance on the employees’ behalf in a single annual payment. This avoids the need for individual P11D reporting and shields employees from a personal tax cost, though the overall cost to the employer (because the tax is grossed up) can be significant.
If you’d like to discuss anything covered in this article, please contact us.
