Anyone planning a Christmas party for their UK office?

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As we say goodbye to Summer, many businesses throughout the UK will be turning their attention to the staff Christmas party. Whether that means thinking about a suitable location (good luck keeping everyone happy!) or choosing your menu preferences (the carrots will be undercooked) there is also another aspect of the festivities that employers should keep in mind; the tax that will be due on the party costs.

There is a small exemption for low cost parties but many employers will struggle to meet the requirements for the exemption.

For staff entertaining functions to be a tax-free benefit for your employees, the following conditions must be met:

• The total cost must not exceed £150 including VAT per head, per year.
• The event(s) must be primarily for entertaining staff.
• The event(s) must be open to all staff in that location (if you have several branches or departments).
• Cost of travel and accommodation is included within the £150 cap.

Provided the £150 limit is not exceeded, there can be any number of parties – for instance 3 parties at a cost of £45 each – throughout the year.

How do I calculate the cost?

Add together the cost of the party or function (room hire, food, entertainment, prizes etc), the costs of transporting staff and their guests, together with the cost of any accommodation provided. All amounts must include VAT.

To work out the cost per head, divide the total by the number of attendees (staff and any other guests) attending the function.

The £150 is not an allowance, so if the cost per head works out at £152, then £152 is taxable as a benefit in kind with the tax payable by the employee (no fun in that) or the employer – see ‘How is the tax collected?’ below.

More than one party?

If there are two parties, for instance, where the combined cost of each exceeds £150, the £150 limit is offset against the most expensive one, leaving the other event as a fully taxable benefit.

For example:

Summer party - cost per head £100
Christmas ball - cost per head £135

The Christamas ball would be covered by the exemption and the employees would be taxed on the £100 Summer party, as a benefit in kind.

What about the employer?

The cost of the staff Christmas party (or any staff annual function) is deductible in the employer's corporate tax computation.

There is no monetary limit on the amount that an employer can spend on an annual function. A party costing more than £150 per head will be an allowable deduction in the annual accounts (as the employees would pay tax on a benefit at this level, so it is just another form of earnings).

How is the tax collected?

Expecting the employee to pay the income tax on the benefit is not a positive experience, so most employers will enter into a PAYE settlement agreement with HMRC. This is a special arrangement where the total tax and social security is calculated but paid by the employer rather than the employees. The tax paid by the employer is itself a taxable benefit and so the calculation of tax and social security due will need to be grossed up. It is important to notify HMRC of the desire to enter into an agreement before the end of the tax year in which the function(s) take place.

If no agreement is put in place, then the value of the benefit must be included on the employee’s form P11d, which will result in the individual paying the tax through the payroll over the following year. Employers Social Security will also be due on the benefit in kind amount.

What about VAT?

1. Assuming the function is open to all staff, input VAT is fully reclaimable on the cost (as it is "staff welfare" and not regarded by HMRC as entertaining).
2. If you are also entertaining UK clients as well as staff, you have to disallow a proportion of input VAT (based on the numbers of clients versus staff).
3. If the event is to entertain UK customers and your staff are there to look after the customers, the whole event is regarded as "entertaining"; you are blocked from any reclaim of input tax.
4. If the event also serves to entertain overseas customers then it may be possible to reclaim input VAT; however this gets very complicated so please talk to us first.

What about record keeping?

An employer must take reasonable care to calculate the annual cost per head of events. When a failure to take reasonable care leads to a loss of tax, tax penalties will apply. It is recommended to keep sufficient records to prove to HMRC, if required to do so, the numbers attending any event so that the cost per head can be calculated.

What next?

If you need advice regarding any aspect of corporate or employment related taxation, please contact us