With the festive season upon us, how do you ensure that your employees enjoy tax free Christmas employment benefits? Here is a quick reminder of how to stay off Santa’s naughty list.
Staff Parties
Christmas parties are a great way of making employees feel valued, however, the thought may not be so gratefully received if it comes with a tax charge! Note though, that even if your Christmas party ends up being virtual, you can still provide fun to your staff without tripping over the tax consequences.
Annual parties or functions are exempt from tax and reporting obligations provided the following 3 conditions are met:
- The combined cost of all annual events is less than £150 per person (VAT inclusive)
With regard to the £150 threshold, the starting point is to recognise that the limit applies to whole cost of the event including food, drink, entertainment, transport, accommodation etc. Furthermore, this is an exemption, not an allowance and so it cannot simply be deducted from the aggregated cost of all the annual events. Each event is either exempt or not exempt in its entirety. For example, a Christmas party costing £155 per head will be taxable in full and not just on the £5 excess over the £150 limit.
In a situation where an employer throws both a Summer barbecue costing £60 per head and a Christmas party costing £100 per head, the total cost of both annual functions exceeds the £150 threshold and as such they cannot both qualify for the exemption. However, as the cost per head for each event was less than £150, the most tax efficient option would be to exempt the £100 per head Christmas party and tax the benefit of the £60 per head Summer barbecue.
- It is open to all employees
As it is often the case that businesses have more than one department and operate in more than one location, it may not be practical to hold a single function. The exemption still applies as long as an event is open to all employees in any one particular location or that all employees can attend one departmental event. This should be distinguished from a situation where the company throws a Christmas party for its directors, regardless of the costs per head, as this is clearly not open to all staff and so the full cost of the benefit would be chargeable on the directors.
- The social function must be an annual (i.e. recurring) event
It therefore stands to reason that any purely one-off events, occurring at Christmastime or otherwise would not qualify for exemption.
Seasonal Gifts
With the continuing trend for hybrid working, employers may alternatively wish to hold a virtual Christmas event, such as were common during the pandemic, which would also be covered by the exemption noted above. However, in addition to this and to help the event go with a bang, employers may choose to provide employees with a Christmas food and drink hamper or a non-cash voucher which could be covered by the trivial benefits rule.
An employee trivial benefit is exempt from tax provided it is not provided for services performed, is non-contractual and has a VAT inclusive cost of up to £50 but beware, as is the case for annual parties, if the cost of the benefit exceeds £50, the whole benefit is taxed.
Directors may have a merrier Christmas, as their trivial benefits cap is £300.
It may also be the case that an employee receives a gift from a third party as a result of their employment and provided that the value of the gift does not exceed £250 it should not be taxable on the employee. Tax will be payable in full on any third party gifts exceeding £250.
What if the benefits do not meet the exemption criteria?
Simply put, the employer will have to report the costs to HMRC on the employee P11D form and pay Class 1A National Insurance on the full cost of the non-exempt benefits or where benefits are trivial include them on a PAYE Settlement Agreement. Should you need any assistance with any of the matters mentioned above please get in touch with Karen Litherland on karen.litherland@claritastax.co.uk or your usual Claritas contact.
