Staff entertaining and the Christmas party
The festive season is now upon us! As we all begin to dust off the tree decorations, a much anticipated and enjoyed occasion for many businesses at this time of year is the Christmas Party – but many business owners are not aware that there can be tax implications to treating your employees to a Christmas celebration.
When it comes to rewarding employees with a Christmas Party you want everyone to have a great time but staff entertaining is only allowable as a tax deduction under certain conditions.
To be non-taxable, the party must:
- Be open to all employees
- Be an annual event, such as a Christmas party or summer barbecue
- Cost £150 or less per person
If your business has more than one location, you can put on separate parties for different departments, as long as all employees have the opportunity to attend one of them.
It is important to note that the £150 is an exemption, not an allowance. This means if your party costs £155 per head, the whole cost of the party will be taxable, not just the £5 per person above the £150 threshold.
While the exemption depends on the Christmas party being primarily for employees, you can extend the invitation for your staff to bring along a partner or a guest; however, the cost of these attendees must be included in the £150 per head limit to avoid being taxable on the staff member.
If the event satisfies the exemption criteria outlined above, there is no tax or NIC due for the staff member. If the event does not meet the exemption rules, then it will be a taxable benefit reportable on a form P11D. This would result in the employee paying Income Tax on the value while the employer pays Class 1A NIC. Alternatively, the employer can apply to pay the tax and NIC on the employee’s behalf via a PAYE settlement agreement.
Where an employer holds more than one annual event it is possible for all of them to be exempt provided that the combined cost of the events is no more than £150 per head. For example, a Christmas party costs £75 per head and a summer outing £50 per head which is less than the £150 combined and both events are therefore exempt. A third event costing £50 per head would breach the threshold and in this case the employer can allocate the exemption to the first two events and only the third event would be taxable.
Christmas Gifts
Some employers choose to purchase Christmas gifts for their employees. These gifts can be tax free by taking advantage of the trivial benefit rule. This provides a statutory exemption from tax and national insurance provided that:
- the cost of providing the gift, including VAT, does not exceed £50
- the gift is not cash or a cash voucher (a voucher which can be exchanged for cash)
- the gift is not provided under a salary sacrifice or other contractual arrangement
- the gift is not provided in recognition of particular past or future services
Similar to the Christmas party this is an all or nothing exemption. If the cost of providing the gift exceeds £50 the whole cost becomes taxable and reportable in the same way as above. Also note you cannot divide a larger gift into several smaller ones to keep within the £50 limit. For example, gift a £20 bottle of wine for Christmas and a Christmas Hamper costing £40 as this would fall outwith the trivial benefits rules.
Christmas Bonus
A popular reward to employees In December is a Christmas bonus. These are tax deductible for the business but are subject to Tax and National Insurance for the employee, as well as Employers National Insurance. Any Christmas bonus must be processed via the company payroll and appear on the employee’s payslip as taxable earnings. Enjoy your Christmas celebrations and ensure you don’t fall foul of the tax rules.
Scott Wilson – Qualified Accountant
Scott is our Accounts Department Senior Manager who specialises in Management Accounting and Corporate Finance. He advises business owners on how their business is performing, identifying areas of potential growth as well as areas of concern. He also has experience in both the buy-side and sell-side of business acquisitions, covering all aspects from business valuation to the due diligence process.
