Whilst Christmas can be an expensive time of year, staff events around this time can be tax free, adding a bit of cheer. They may be included in the annual tax exemption of up to £150 per person where all staff are invited. While most employers include food, drink and entertainment when costing such events, many forget they should also include costs such as accommodation and transport to and from the event if they also fund these expenses for staff.
Keeping a record of who attended, not those expected to turn up, is also important because HMRC calculates the cost based on the number of attendees. Guests can also include non-employees, such as spouses or partners, which will potentially reduce the cost per head.
How does the exemption work?
There is no income tax or National Insurance contributions (NIC) charge for an annual staff party (where all employees are invited) if the total cost of the event per attendee (inclusive of VAT) is less than £150 per head. However, once this limit is exceeded, the full amount is liable to income tax and NIC for both staff and employer alike. It will be taxed as a benefit-in-kind, which could be a bit of a surprise if not managed correctly come the new year. Many employers enter into a PAYE settlement agreement (PSA) with HMRC to pick up the employees’ tax bill if the event does tip over the limit, or if there is more than one annual all-employee event in the tax year and the aggregate cost per head exceeds the £150 limit, such that one or more of them is taxable.
What sometimes trips employers up are areas such as:
- the event was planned for more attendees and the costs per head were expected to be below £150 per head but attendees on the night reduced; or
- someone claimed for extra drinks in the bar later, resulting in the event suddenly being over the limit.
Finally if you prefer to have a staff event at a different time of the year don’t forget that you could still buy staff a small present such as a bottle of wine or a box of chocolates for Christmas. These may be treated as ‘trivial benefits’ that are income tax and NIC free provided the cost is less than £50, the benefit is not cash or a cash voucher or in recognition of particular services (nor part of a salary sacrifice), although if the employer is a close company there is also an overall annual trivial benefits limit of £300 for directors and other office holders of the company (including benefits provided to members of their family or household), which is sometimes forgotten.
What should employers do?
- make sure they retain enough detail on the nature and cost of the event, as well as the number of employees (or others) who attend;
- make sure expenses are posted to the right accounting codes so they can easily add up all the costs;
- review their PSA to see if it covers what might be needed and update it if necessary; and
- where items are excluded from the PSA or P11Ds, ensure that suitable records are kept summarising the reason.
For more information please get in touch with Susan Ball.