I know it feels like summer is only just drawing to a close but as we fly through October, attention will soon turn to Christmas (I can almost hear the groans) and the annual Christmas party.
Although this is a great way of rewarding staff for all of their hard work throughout the year, care needs to be taken to ensure this doesn't end up leaving them with an unexpected income tax liability.
Starting with the good news first, the cost of providing the Christmas party is generally a tax deductible expense for a business, provided the costs aren't overly excessive. However, many business owners are unaware that there could be tax implications for the staff personally.
Unless the function/party meets the following conditions, it will be taxable as a benefit in kind on the staff and must be included on their P11d (on which they will pay income tax):
Cost – The cost of the function/party, including VAT (whether or not this can be reclaimed) must be less than £150 per head. This will include all costs paid for by the business and not simply the venue hire/food and the bar bill. Therefore if transport/overnight accommodation is also provided then this must be factored in.
The good news is that this £150 per head can also include spouses/partners if they attend the event, therefore the overall limit could effectively be doubled up. However if non-staff members do attend the event, this can affect the amount of VAT recoverable by the business.
The bad news is that the £150 is an exemption not an allowance. Therefore if the overall cost of the party amounts to £151 per head, the whole amount will be taxable on the staff attending as a benefit in kind (or £302 if their partner/spouse also attends) i.e. not simply the £1 excess.
The limit is also per tax year not per event. Therefore if any employers are feeling particularly generous and also provide a summer party, the combined cost of both must be less than £150 per head. If both parties cost say £100 per head, the exemption could be used against one with the other fully taxable.
Availability – The function/party must be open to all employees or all of those at a particular location.
Annual – The exemption is only available for annual events, such as a Christmas party. Ad-hoc staff meals throughout the year are unlikely to qualify for the exemption.
If the function does fail to meet the above conditions and is therefore taxable, it is possible for an employer to enter into a PAYE Settlement Agreement (PSA) with HMRC to settle the tax on their employee's behalf. However, this could significantly increase the overall cost for the employer!
It may be more cost effective to request a contribution from the staff for the difference or limit the bar bill to stay within the £150 per head.
The owners of an unincorporated business such as a sole trade or partnership are not considered staff and therefore will have different tax implications to consider.