26 October 2022
2020 was a tumultuous year, and as the festive season approached many employers were left uncertain as to how to boost staff morale.
A year on, employers may still be grappling with whether or not to hold a Christmas event. For those that are, or for those that are holding virtual parties or instead giving gifts, the key employment tax considerations should not be overlooked.
Can a staff Christmas party be provided as a tax-free benefit?
A staff Christmas party qualifies as a tax free benefit if it meets the ‘annual events’ exemption. In summary, for the event to qualify for this exemption, it must:
- Be open to all employees.
- A party for directors only (unless all staff are directors) will not qualify for the exemption because it is not open to all employees.
- An annual party open to all employees at one location should still meet this part of the exemption even if an employer has multiple sites.
- Employers who hold separate events for different departments can still satisfy this part of the exemption, provided that all employees have the option of attending at least one of them.
- Be an annual event.
- It must take place once a year on a recurring yearly basis.
- A one-off event, for example to celebrate the 50th anniversary of a business, does not qualify.
- Not be provided under salary sacrifice arrangements.
- Cost £150 or less per attendee.
- The £150 limit includes VAT plus any additional costs of related travel and overnight accommodation met by the employer.
- This is a threshold, not an allowance. If an event exceeds £150 per attendee, there is no ability to exempt the first £150. The whole cost (subject to understanding who the attendees are) is then subject to tax and NIC.
- It is important to take reasonable care to calculate and record the cost per attendee by dividing the total cost of the party (including VAT, and travel and overnight accommodation met by the employer) by the number of attendees. Attendees are all guests, not just employees.
- The exemption can be used to cover more than one event, provided that the £150 limit is not exceeded in a tax year and all other conditions are met. For example, if an employer holds an annual summer party at a cost of £45 per attendee, and a Christmas party costing £100 per attendee, the exemption might be used to cover both parties provided the other conditions are met for each party. If however, a Christmas party cost £120 per attendee and the summer party cost £45 per attendee, the £150 limit would be exceeded. If all other conditions were satisfied, it would then be sensible to use the exemption against the Christmas party (which has the greater cost) and treat the summer party as a taxable benefit (this would typically be dealt with via a PAYE Settlement Agreement – see below).
Can the exemption be used for a virtual staff party?
Although likely to be less relevant now, HMRC has previously confirmed that the annual events exemption can apply to the cost of virtual parties in the same way as it would to an in-person event. This is provided all the conditions for exemption are met.
What if the annual event exemption doesn’t apply to our staff Christmas party?
A benefit in kind liable to tax and NIC will arise if the exemption cannot be applied (for example because the event costs more than £150 per attendee).
To save having to report the benefit arising on employees’ forms P11D (which is problematic and can result in employees paying income tax on the Christmas party), most employers deal with such taxable staff entertainment costs through a PAYE Settlement Agreement (PSA). This allows the employer to report the event to HMRC, and pay the tax and NIC due on a grossed-up basis to HMRC.
The PSA liabilities are calculated on a grossed-up basis because, by using a PSA, the employer is agreeing to meet the cost of tax that the employee would otherwise pay personally.
What is the tax treatment if we give gifts instead?
Giving gifts, such as non-cash retail vouchers or Christmas hampers, to employees still appears to be a popular alternative to parties for many employers.
Such gifts could be covered by the trivial benefit in kind exemption. The exemption applies where all these conditions are met:
- The cost of providing the benefit does not exceed £50 (including VAT and delivery).
- The benefit is not cash or a cash voucher. A cash gift, such as a Christmas bonus, does not qualify.
- The employee is not entitled to the benefit as part of any contractual obligation. Contractual obligations can take different forms and HMRC’s view is that even a legitimate expectation of receipt can amount to contractual obligation.
- The gift is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services). The gift must therefore be made wholly on personal grounds or for staff welfare purposes.
Where all of these conditions are met, there are no tax or NIC liabilities for either the employer or the employee. Where one or all of the conditions are not met for a seasonal gift, the gift will be taxable and liable to NIC.
Like taxable staff entertainment, most employers would seek to use a PSA to deal with such taxable gifts because it saves having to report the gifts on employees’ forms P11D or even via the payroll.