Planning an office party? Beware the taxman
It is worth being aware that a staff party, paid for by an employer, technically counts as a benefit in kind on which employees are taxed.
However, there is an exemption that allows employers to host the event without it being treated as a taxable benefit – provided the cost per head is no more than £150.
For the exemption to apply, the event must be generally open to all and not be exclusive to a group. Events based on separate working locations or departments of employees are allowed, if generally available to all employees within the location or department. Unless the principle of generality is achieved, then the full amount is taxable against the employees who attended. For example, an exclusively-directors event, which excluded employees, would not qualify for the exemption.
Employers may organise more than one annual event and all such events may qualify for relief provided the cost per head, in any one tax year, does not exceed £150 in aggregate. If say, two events are held, one costing £120 per head and the other £50 per head, the £150 limit is breached. In that case, the whole of the first event will fall within the £150 exemption but none of the second. If only one event is held in the year and the sum spent is more than £150 per head, then the full amount spent will become liable to national insurance (NI) and income tax for both staff and employer.
When planning an event and estimating the tax implications, remember that the price per head is calculated on the total number of attendees, that is all staff, their partners and any clients – not just employees. Second, make sure you include all incidental costs. This means adding up not just the venue hire and catering costs but all the other things, such as entertainment fees, taxi fares, overnight accommodation and any VAT charged (regardless of whether you are VAT-registered).
Divide the total cost of each function by the total number of people (including non-employees) who attend, in order to arrive at the cost per head. If an HMRC enquiry is launched, you will need to provide details of all the costs and attendees.
Beware of trying to apply the HMRC’s concession to ordinary staff entertaining. You need to hold an event that is clearly a formally organised function. Some employers also make the mistake of charging the party to “entertainment” in the accounts, then forgetting that an event worth over £150 per head must be disclosed on the P11D.
There are potentially harsh penalties for incorrect completion of the forms as well as corporation tax implications.
It is worth remembering that although VAT on entertainment is not reclaimable, VAT on staff parties can be reclaimed, even if it exceeds £150 per head.
Turning to gifts for staff from their employer – HMRC does accept that minor gifts may be provided tax-free for employees, provided there is no legitimate expectation held by employees that the gift will be made. The trivial benefit exemption provides a limit per gift of £50 per employee and the gift must not be a reward for services.
Where there is a large number of employees, the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees.
If the gift extends beyond the trivial, (a case of wine, a turkey or a Christmas hamper for example), it is likely to be treated as a taxable benefit in kind. Unless this cost is shown on the employee’s P11D (and the employee pays the tax accordingly) the employer will need to enter into a PAYE settlement agreement with HMRC.
Finally, if you are considering making Christmas gifts to customers or clients, beware there is a £50 limit in any one tax year. The gift must be a business-related gift (a calendar, clock or pen for example). It must clearly carry an advertisement for your business, otherwise it will be classed as entertainment expenditure and will be disallowed.
Tim Stovold is head of tax at Moore Kingston Smith
Originally published as Planning a Christmas office party? Beware the taxman, in Economia on 4 December 2019.