Employers planning a staff Christmas party risk tax demands because of increasing entertaining during the rest of the year.
The official annual limit for staff entertaining, set by HMRC, is £150 for each employee.
“Unfortunately, the growing popularity of, for example, ‘pizza nights’ and summer drinks means that the limit is often now reached long before Christmas, and that is catching out unwary employers,” warns Chris Smith, Head of Personal Tax Compliance at accountancy firm BKL.
“The implications are considerable. If the Christmas party does breach the annual limit then the whole cost of that event is taxable on employees as a benefit in kind. The employer also has to pay national insurance at 13.8%.”
The key points for an employer to consider before they dig into their pockets are:
- The “per head” figure is based on all attendees. If family members are invited and the figure exceeds £150, employees will be taxable on the amount allocated to them and their family members.
- For example, 10 employees each bring a guest to the Christmas party which costs £3,500. Each employee would be taxable on £350. The company would also have Class 1A National Insurance (NI) to pay on the £3,500. However, if the same party had only cost £3,000 then the £150 a head exemption would apply (because £3,000 divided by 20 equals £150) and there would be no taxable benefit or NI obligation.
- The exemption is cumulative over the year. If the total exceeds £150 a head then the exemption can be allocated in the most tax efficient way. For example: annual firm “birthday” party costing £40 a head, summer party costing £70 a head and Christmas party costing £100 a head. The cumulative total of £210 exceeds the exemption, but by using the birthday party and Christmas party to soak up the exemption (a total £140 per head), would leave only the summer party taxable on employees.
- for events not falling within the annual limit the whole amount is taxable on employees as a benefit in kind and P11ds will need to be prepared with the cost being allocated amongst employees.
- Employer will also have to pay class 1A National Insurance on the total at 13.8%
- An employer can settle employees’ personal tax liabilities on their behalf, but then employers will owe NI on the total cost and on the tax settled. This is known as a PAYE Settlement Agreement (PSA).
- The VAT payable on staff entertainment can generally be reclaimed, but not if it is a partner or director only event. If family members of employees are invited free of charge then not all of the VAT can be reclaimed.
- The £150 a head limit is only relevant for the benefit in kind rules. Any amounts spent on staff entertaining will be deductible in the employers business tax computation.