Businesses urged to avoid tax hangover from staff Christmas parties

It has been a tough year in many respects so it is only natural that those businesses who can afford it will want to reward hard-working staff with an all-expenses-paid, morale-boosting celebration at Christmas. However, while there is usually no need to inform the tax authorities of such events, business leaders and directors need to tread carefully to avoid overspending and having to report the tax implications to HMRC.

HMRC explains that to be exempt from tax and National Insurance (NI), parties or similar social functions – including online or virtual parties – must be open to all employees, be annual (such as a Christmas party or summer barbecue) and cost £150 or less per person. The value of such events is worked out through adding the cost of the function plus associated travel, such as taxis, or hotel accommodation, all including VAT, then dividing by the total number of attendees – not just the number of employees.

It should be noted that the £150 is an exemption and not an allowance and that the whole cost is subject to tax and NI if the figure was exceeded, even by just £1. The £150 limit can be applied to an aggregation of multiple annual events, not just the Christmas party, with the entire cost of an event which breaches the £150 annual functions exemption being subject to tax in full.

If spouses or partners were also invited to the party, it would trigger an extra £150 exemption.

Although, the £150 limit hasn’t been changed since 2003 and, according to the Bank of England, would be worth £266.57 today* it might be argued that HMRC needs to show a little more festive spirit.

There are two main courses of action if the function exceeds £150 per person. You could report the cost of the party to HMRC as a staff benefit in kind so your staff pay tax on their share of the cost, but that will maybe not go down well with employees.

Instead, if you can’t avoid going over the limit, there is the option to enter into a PAYE Settlement Agreement (PSA) with HMRC which allows employers to make one annual payment to cover all the tax and NI due on benefits which are minor, irregular or upon which it is impracticable to operate PAYE.

Additionally, employers could also take advantage of HMRC’s ‘trivial benefits’ exemption for which no reporting is required and no tax or NI payable if conditions are met, as this could help to give a boost to staff, particularly at Christmas. The criteria is that it costs £50 or less to provide, it isn’t cash or a cash voucher, it isn’t a reward for work or performance and it isn’t in the terms of a contract. Please note that there is an annual exempt amount cap that applies to directors and office holders of close companies (and members of their family and household) of £300 per year.

Rather than a traditional Christmas turkey, many employers now wish staff a Merry Christmas with the gift of a retail voucher.

If you feel the threshold is in danger of being exceeded or have any questions on appropriate management or reporting of the exemption, please get in touch with a member of our specialist tax advisory team via the form below. Alternatively, please contact your usual Azets advisor.