Yes, it’s that time of year again! Christmas is on the horizon, and office Christmas party planning will soon be in full swing for many companies across the UK.
So, if you’re planning a shindig for your employees, make the most of one of the few remaining tax breaks available to small businesses – but be aware that the rules are strict.
Christmas parties, regular summer barbecues and other annual staff events can all qualify for a tax exemption, provided the company meets certain conditions. The £150 per head exemption applies across the tax year, rather than to each event separately.
How does the £150 staff party exemption work?
If you want to have a party that can benefit from the tax exemption, there are a few rules you need to follow.
The party must be:
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An annual event, such as a Christmas party or summer barbecue.
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Open to all employees, or all employees at a particular location.
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No more than £150 per head, including VAT and associated costs.
You can offer more than one regular event to employees over the year, but the combined cost of the events you want to exempt must be no more than £150 per person.
One-off events do not normally qualify. For example, a party organised to celebrate a company’s 25th anniversary would not count as an annual function.
The £150 limit is not an allowance. If an event costs £160 per head, the tax charge applies to the entire amount of the benefit provided, not just the £10 excess.
What costs are included in the £150 limit?
When working out the cost per head, you need to include all the expenses associated with the event, including food, drink, venue hire, entertainment, transport and any overnight accommodation provided.
The calculation must include VAT, and the total cost is divided by the number of people who actually attend, including employees and their guests.
For example, if a company spends £3,000 on its Christmas party and 25 people attend, the cost is £120 per head.
You can also include close family members as guests at the party. Their food, drink, accommodation and other costs must be included when calculating the average cost per person.
What if you hold more than one party during the year?
If you have a summer barbecue, for example, which costs £60 a head, then you have £90 per person left to spend on the Christmas party if you want both events to qualify for the exemption.
If you hold several regular events in a year and the combined cost is more than £150 per person, you will need to decide which events to treat as exempt.
For example, if your company has a Christmas party at £100 per head and then a summer party costing £80 per head, the combined cost breaches the £150 limit.
You would have to choose which event you want to exempt. It makes more sense to exempt the Christmas party, which has the higher per-head value.
The £80 summer party would then be taxable, but you wouldn’t have to pay tax on both events simply because their combined cost exceeded £150.
If an individual event costs more than £150 per head, the whole amount becomes taxable, not just the excess.
The party must be open to all employees
The parties must be annual, like the Christmas party, and must be open to all employees; otherwise, they will not be considered exempt.
If you happen to have various offices around the UK, then it’s fine to have different parties in different places, as long as all members of staff are able to attend one of them.
Separate departmental parties can also qualify, provided all employees have the opportunity to attend an appropriate event.
If there is a specific regular event that is only open to a smaller number of staff, such as directors of the company only, then this would not normally be exempt under the legislation.
Employees don’t have to attend the party for it to qualify. They simply need to have been invited.
Do the same rules apply to virtual Christmas parties?
If your staff are in a variety of locations, or primarily work from home, then you might decide to provide a virtual Christmas party.
This is fine, and the same rules apply as they would to an in-person Christmas party.
You would still need to ensure that the total cost of qualifying annual events doesn’t exceed £150 per person, and that all staff have been offered access to the party, virtual or otherwise.
The complication here is how to ensure your employees are provided with, say, food and drink for the virtual party without the employer simply giving money to the employee.
It could be difficult to prove that this money was solely used for the party if an HMRC enquiry was undertaken.
Instead, the employer should consider providing the food and drink in a specific way to all employees attending, which would allow the cost to be identified centrally.
This could be done by sending a food and drink parcel or hamper to every employee in advance of the event, to be consumed while everyone is at the online party.
The company should keep records of the expenditure alongside its other party costs.
What happens if a staff party isn’t exempt?
Remember, if any of the events you have put on for staff throughout the year don’t qualify for the exemption, then you must account for the taxable costs.
The employer will generally need to report the relevant benefit on each employee’s P11D form and pay Class 1A National Insurance on the amounts.
One alternative is to arrange a PAYE Settlement Agreement (PSA) with HMRC.
This allows the employer to settle the tax and National Insurance due on certain staff entertainment costs, rather than employees having to pay the tax themselves.
A PSA can be particularly useful where a company has organised an event that exceeds the £150 limit and doesn’t want employees to receive an unexpected tax bill.
The employer pays the Income Tax and Class 1B National Insurance on the benefits covered by the agreement.
One other thing to consider is that if you have staff on salary sacrifice arrangements within your business, you may need to report how much each social occasion is worth to those employees.
We can help you
If you have concerns about whether your annual Christmas party or summer barbecue needs to be declared to HMRC, then get in touch with BI Accountancy and we’ll be happy to offer the help and guidance you need.
You can also find out more about your obligations on the GOV.UK website, which is the best way to ensure you don’t end up with a financial hangover.
