We are often asked what the potential tax implications are for staff entertainment, in respect of the Christmas party for employees.
This question needs considering from two angles. The first is whether the cost would be an allowable expense for business tax purposes; the other being whether it would be a benefit, taxable on the employees via their P11Ds. Whilst there is a ‘general rule’ answer to both of these queries, there are a number of pitfalls to be aware of, so we shall cover each question in some detail. You will also need to consider the VAT treatment.
Is a Christmas party for employees an allowable expense for business tax purposes?
The general rule is that the cost of staff entertainment is tax deductible, as long as it is not incidental to the entertaining of others. If you were to invite your suppliers and/or customers to attend too, careful consideration would need to be taken when apportioning the costs pertaining to staff entertaining and supplier/customer entertaining, as the latter is not tax allowable.
Is a Christmas party for employees taxable on my employees as a benefit?
This area has a lot more potential problems to look out for!
HMRC will review staff entertaining costs in company accounts where HMRC identify the following:
- staff entertaining costs have been included in the company accounts
- there is no PAYE Settlement Agreement (PSA) in place, or staff entertaining has not been reported on forms P11D.
Then HMRC may contact the employer to seek confirmation that all staff entertaining costs incurred were not a taxable benefit.
The general rule is that the party is not a benefit, so long as it is an annual event, open to all staff and the total of all such annual events in a given tax year does not exceed £150 (inclusive of VAT) per head. Now let’s break that down and cover the potential pitfalls.
What is the issue?
Staff entertainment provided to employees can be a taxable benefit. It includes social functions, staff events and parties.
Employers should keep records of all staff entertainment expenditures, including who attended and the costs incurred.
The Employer will then need to consider whether the entertainment is a taxable benefit or falls within one of the exemptions.
If the entertainment costs are taxable then the Employer can choose
- to have it included on their PSA so that they settle the tax and Class 1B National Insurance Contributions (NICs) due on behalf of their employees, or
- should they be reported on the employee forms P11D (resulting in tax liability for the employee), with the company settling the Class 1A NIC due.
What are the implications of getting it wrong?
If taxable staff entertainment has not been reported correctly, HMRC can look to recover the tax and NIC due for the past four years for tax and up to six years for NIC. HMRC may also apply penalties and will charge interest on the unpaid tax and NIC. For past years, we recommended that a voluntary disclosure be made to HMRC. It can also be possible to mitigate potential penalties where the disclosure is unprompted.
Is all staff entertainment taxable?
No. There are two main areas that can prevent entertainment from being taxable.
- Trivial benefits exemption
Where staff entertainment is not covered by the annual events exemption it is useful to consider whether it would meet the conditions to be exempt under the rules for trivial benefits provided to employees. Trivial benefits can be provided to employees free of tax/NIC where the following conditions are met:
- The cost of providing the benefit is £50 or less. In establishing the cost of the benefit it needs to be considered whether or not a benefit has been provided on more than one occasion during the course of the tax year. If so, then the total cost will be the sum of all costs incurred by the employer for all occasions. If the total costs exceed £50 then the entire cost of the benefit is subject to tax. For example, a regular subscription of £40 monthly membership to the local gym, whilst individually is less than the £50 limit it would be treated as a total of £480 and in excess of the £50 limit.
- The benefit is not cash or a cash voucher
- There is no contractual entitlement to the benefit, and it is not under a salary sacrifice arrangement
- It is not provided in recognition or in anticipation of, particular services performed by the employee as part of their employment
- If the employer is a close company (a limited company with five or fewer ‘participators’) and the benefit is provided to a director/office holder of the company (or family member) the exemption is capped at a total cost of £300 per tax year.Annual Function Exemption
This is the Christmas party exemption, but it does not have to be a Christmas party, just an annual function, so it could be a summer BBQ, so long as it is an annual event and not a one-off or indeed too frequent.
There is an exemption available for annual events where certain conditions are met. The staff entertaining provided must meet all of the following conditions:
- Costs £150 or less per head
- Is annual in nature (e.g. Christmas Party, Summer Barbecue)
- Is open to all your employees.
The nature of the entertainment provided can give rise to several complexities in applying the exemption. These include such things as calculating the cost per head where employees can bring a spouse/partner, including the cost of travel/accommodation and where multiple parties are held for employees across a number of different sites or locations.
1. Annual event
Pretty self-explanatory, such as a Christmas party or a summer barbecue. HMRC seem to interpret this as a way of differentiating between this and casual hospitality occurring at frequent intervals (rather than the strict definition of annual being every year), although as far as we are aware this has never been tested in context.
2. Open to all staff
Not all staff have to attend, but they all have to be entitled to attend. If you only offer the party to certain members of staff, it will be taxable on those staff members as a benefit.
3. Total costs do not exceed £150 per head – This area probably has the most potential problems.
The £150 is inclusive of VAT.
4. Per head – is the total headcount of attendees, including staff and their partners/family alike (if the invitation is extended to guests).
The cost of the event is from start to finish and includes the likes of transport costs to/from the event and accommodation costs if these are provided by the employer.
If the cost is more than £150 per head, it is the entire cost that becomes a benefit, not just the amounts more than £150 per head.
If you have more than one annual event of this nature, the £150 per head is for the tax year, not per event. Thereby if your summer barbecue costs £50 per head and the Christmas party £105 per head, the full £50 for the barbecue would be taxable (as you can choose which events make the best use of the £150 exemption).
Our Christmas party this year has come in at £160 per head (taking into account employees and guests). What should I do?
Essentially, you have two options here:
- P11D’s
The cost of the Christmas party attributable to each staff member will need to be included on their P11Ds (i.e., £320 if the staff member brought their spouse along). This will result in them paying tax on this amount as if it were normal employment earnings, which is likely to be unpopular with staff. The business will also be liable to pay 13.8% Employer’s National Insurance on the total benefit cost. - PSA
As an employer, you can agree with HMRC that you will cover the tax and National Insurance by way of a PAYE Settlement Agreement (PSA). This will obviously increase the cost of the party to you as a business.
- For example, you have a Christmas party, which costs £1,600 and has 10 people in attendance. Each staff member in attendance is a basic rate taxpayer. With a PSA in place, the total cost to you as a business would be £2,276 (£1,600 grossed up for tax at 20% to £2,000 plus 13.8% Employer’s National Insurance). In the same example, if all staff members were higher rate taxpayers, the total cost to the business would be £3,035 (£1,600 grossed up for tax at 40% to £2,667 plus 13.8% Employer’s National Insurance). If there was no PSA in place, the total cost to the business would be £1,821 (£1,600 plus 13.8% Employer’s National Insurance).
- If there was no PSA in place, the total cost to the business would be £1,821 (£1,600 plus 13.8% Employer’s National Insurance). The staff would suffer the tax personally.
How can we help?
If you have any questions we would be happy to discuss them with you or anything else that you would like to talk about. You can contact us on 01273 963656 or 01444 716946, or email us.
