Remain jolly and don’t let tax pitfalls ruin the season for your business

The staff Christmas party

Current HMRC legislation permits a tax relief in the form of an exemption of £150 (which equates to £125 plus VAT) per head.

This can be spread over a number of events in the same tax year provided that each event is capable of “recurring annually”. As the tax break was formerly a concession, the potential pitfall to note here is that HMRC will carefully examine any staff party expenditure to see whether all related costs have been included and that the legislation has been complied with. In order to qualify for the exemption, any event should be open to all staff employed at a particular location.

An example of this would be, a UK company could organise an event in each regional office and not have any tax issues. However, if one particular set of employees (such as directors/senior management) also has an additional exclusive Christmas event, this will be a taxable benefit, because not everyone in the Company at that location is entitled to attend and it does not fall within the terms of the tax relief, whatever the cost.

Expenditure on staff parties receives a corporation tax deduction (subject to meeting all the qualifying conditions) for the organisation and the VAT can be recovered (subject to any normal restrictions on claiming VAT such as partial exemption, and also assuming that only staff and not staff plus partners attend). The latter results in a more limited VAT recovery.

If entertainment is provided solely to directors and partners of a business then the VAT would not be recoverable.

So, what should you take from the above?

• Stay within the terms of the allowable tax relief if you can ensure no unexpected tax liabilities arise.
• Should you be unable to have a traditional “physical” Christmas party/event, you could replace it with a virtual one. HMRC have confirmed virtual Christmas party/events meet the required criteria, to the extent that a structured online event/party meets the normal conditions.

Associated costs of putting a virtual party/event on could include food provided/delivered to employees principally for enjoyment at the event, should qualify. However, we would advise caution in terms of expenses on items which are peripheral to the event and capable of being enjoyed separately.

For Companies/businesses with larger budgets, what happens if a single event is more than £150 per head or more than £150 per head is spent during the tax year? In the first instance, the event becomes taxable, in the latter, if one event is under £150 per head, the second event that put the annual functions cost above £150 per head would be a taxable benefit on the full cost, not just the amount in excess of £150 per head. However, your organisation will still get a corporation tax deduction, and you will be able to recover VAT as normal regardless of the cost provided the purpose of the event is to reward good work or maintain and improve staff morale, so the real impact is on budgeting and the tax charge that will arise for the employees concerned.

If you have been holding a series of virtual events during the year to maintain staff morale and are now holding or planning to hold in person social/seasonal events, it is important to keep accurate records of who actually attended each event to check whether the overall costs per head exceed the limit for the year.

Your employees won’t be too impressed if they get taxed on their Christmas party so, if you are considering a party/event which will exceed the exemption, or realise you have gone over, or will go over the threshold after the event, the tax cost could be met on the employees’ behalf through a formal annual agreement with HMRC which is called a PAYE Settlement Agreement (PSA) on a grossed-up basis. Whilst PSAs are widely used, settling tax on a grossed-up basis means that the tax cost can be broadly equivalent to the cost of the event itself.

Staff gifts

Another related pitfall to avoid involves giving employees gifts at Christmas.

Generally, gifts are taxable but, there is now a statutory exemption for ‘trivial’ benefits. A benefit can be given to an employee without a tax or NIC charge arising provided all of the following conditions are satisfied;

• The cost of providing the benefit does not exceed £50
• The benefit is not cash or a cash voucher
• The employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice)
• The benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services)

Where the employer is a Close Company and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family or household), the exemption is capped at a total cost of £300 in the tax year (i.e. the cost of benefits are £50 or less per benefit and the total cost of all benefits does not exceed £300).

It is important to tread carefully, taking advice and ensure the primary reason is fully understood – is it a well done for performance or is it a Happy Christmas gift? How you communicate and set out the reasoning for the gift will interact and impact the tax treatment.

Next steps

Tax has never had a higher profile following recent events in UK government and employee reward/remuneration is constantly in the spotlight, with tax regulations that are complex and subject to constant change. Non-compliance with legislation and exemptions could have a potentially significant financial impact on employers, but with detailed knowledge and understanding of the rules our Employment Tax team can help support you in ensuring potential risks are managed and opportunities are maximised.

Please do get in contact with a member of our Employment Tax team or your local office contact should you have queries on any of the above.

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