Tax and the Christmas party

THE OFFICE Christmas party rounds off what may have been another difficult year and gives a chance for staff to relax and enjoy themselves. Employers will want to boost staff morale but this has to be weighed against ever tightening budget constraints. It is worth considering the tax implications when planning the celebrations to avoid the danger of losing sight of the true cost of the event.

Corporation Tax

In general, client entertaining is a disallowable expense. However, entertaining employees is specifically allowed, as long as it is not incidental to the entertainment of others. If you invite clients and customers to your party it is important to consider how to apportion the costs for corporation tax purposes as you may be hit with a bill.

VAT

Input tax on entertaining is usually not recoverable however, employee entertaining is. The definition of employees for VAT purposes does not include partners of existing staff, or former employees. Therefore if your party includes guests, you will need to apportion the relevant costs appropriately for VAT.

Taxable benefits in kind

For benefit in kind purposes, there is an exemption for employee entertaining, but terms and conditions apply. The relief only applies to ‘annual parties’ available to all staff and is set at £150 per head. This figure is inclusive of VAT, so with VAT increases taking effect on 4 January 2011, the timing of the party may be relevant.

If the cost of annual parties goes over £150 per head then unfortunately all the costs (not just those above £150 per head) are taxable as a benefit in kind. It is important to note that the cost of the party is the whole cost of the event, from the start to the end and as a result, taxis home and any overnight accommodation have to be included in the calculation. It is easy to lose sight of the total cost as additions, such as Christmas decorations for the function room, that take the amount over £150 per head will result in a considerable and avoidable tax bill.

In the event that the limit is exceeded, the benefit must be reported on each employee’s P11D. Alternatively, the grossed up tax can be paid by the employer through a PAYE settlement agreement (PSA). However, this method means that a total cost per head of £160 could lead to an additional tax and national insurance bill of a further £140 per person.
The £150 can be applied to more than one annual social function. Two parties at £70 per head rather than one at £160 per head may therefore be more attractive to you and to your staff for both social and financial reasons.

It is also important to note that the amount of £150 per head applies to all those attending the function not just employees which will come into play if employees are allowed to bring guests.

Trivial Christmas gifts

If you provide employees with a seasonal gift, such as a bottle of wine or a box of chocolates, as long as the cost is reasonable HM Revenue & Customs (HMRC) will accept that they are not taxable. Unfortunately HMRC will not tell us what monetary limit it considers as ‘trivial’ but in our experience, less than £50 a head is usually acceptable. This contrasts with a gift voucher, which is always taxable, whatever the amount.

Francesca Lagerberg is head of tax at Grant Thornton