Staff parties and gifts at Christmas are not always tax free!

With Christmas just around the corner and staff Christmas parties in full swing, businesses need to ensure they keep the taxman happy as well as employees.  

There are Christmas exemptions for trivial gifts, but there are some conditions.

  1. The cost of providing the gift can’t exceed £50 (including VAT). If it does, the full amount is taxable, not just the excess over £50. Another rule is that the benefit is not cash or a cash voucher. 
  2. There must also be no contractual entitlement to the gift or a gift provided as a reward. In addition, just because a gift is provided each year, or is provided to all staff members, it doesn’t mean that the employee has a contractual entitlement to it.

When hosting Christmas parties and events, as employers it is essential that you stay within the rules, especially where offices and staff are spread across numerous locations.

The good news for employers is that HMRC provides an exemption for a staff Christmas party, provided that the following conditions are met:

  • the event is annual
  • open to all employees
  • costs no more than £150 per head

However, some businesses do not find it practical to hold a single function for everyone.  Fortunately the taxman realises this, and will allow the exemption to apply across separate locations and if required, departments. For businesses with more than one office, an annual event that’s open to all staff based at one location still counts as exempt. Businesses can also put on separate parties for different departments, as long as all employees can attend one of them.

If an employer provides two or more annual parties or events, no charge arises in respect of the party, or parties, if the costs per head don’t exceed £150 in aggregate. If it does go over £150, then whichever event can best use the £150 would be exempt, and the others taxable.

It is essential to note that this is an exemption, not an allowance. Any functions outside the scope of the exemption are chargeable on the full cost per head, not just the excess over £150. The cost of the function includes VAT as well as transport and/or overnight accommodation if these are provided to enable employees to attend.

If any of the events an employer provides are not exempt, the costs must be reported to HMRC and National Insurance contributions (NICs) will be paid on them. This must either be reported on each employee’s P11D form, so the employee personally pays tax on the apportionment, and also detailed on the annual Class 1A NI return (P11D(b)), which is paid by the employer.  Alternatively the costs can be included in an annual PAYE settlement agreement (PSA), where tax and NIC is paid for by the employer on a grossed-up basis, although over the coming years these are being phased out.

Christmas is a time of festive cheer and goodwill to all, therefore it is essential that you don’t inadvertently give your staff an unexpected cost to your perceived hospitality.

If you'd like any more information about Christmas tax exemptions, please get in touch

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