As the holiday season approaches, many businesses prepare to celebrate with annual Christmas parties. While these events foster team spirit and recognize employee contributions, employers must navigate the tax aspects of staff parties, particularly the rules surrounding non-taxable benefits.
Understanding these regulations is essential for compliance and to maximize the advantages of such celebrations. This guide clarifies the tax implications of staff gatherings, focusing on non-taxable benefits, gifts, entertainment, and awards.
By knowing the guidelines, employers can create enjoyable experiences for their teams while minimizing tax liabilities.
What Non-Taxable Benefits Can You Expect for Annual Staff Parties?
Employers can enjoy a tax exemption on staff parties if the cost per person stays below £150 per tax year. This exemption applies regardless of when the function occurs, although many parties take place around Christmas.
To calculate the average cost per function per person, employers must include VAT, accommodation, and transport costs. They divide the total by the number of attendees, including non-employees.
Each function must generally be open to all employees, including security staff and cleaners. However, it can be restricted to specific departments, divisions, or sites.
A function exclusively for directors only qualifies if all employees are directors. If any staff members are excluded, the entire function becomes taxable for those attending, with no exemption.
If the total cost per person for a single function exceeds £150, the entire benefit is taxable because the limit has been surpassed. For multiple functions, only those totalling £150 or less qualify for the exemption.
For example, if there are two functions costing £100 and £75, and the employer deems the £100 function exempt, the £75 function becomes fully taxable. An employee attending only the £75 function will face taxation on the full £75 benefit.
If they attend both, they will still only be taxed on the £75. If the employee does not attend either function or only attends the one costing £100, no taxable benefit arises.
Keep in mind that the £150 annual function exemption does not affect the employer’s tax position. This exemption relieves employees from an income tax benefit in kind charge.
Employers can deduct these expenses regardless of their impact on employees. Additionally, they can recover VAT for expenses incurred for employee attendees but not for other attendees like partners, customers, or suppliers.
Are Gifts Taxable?
Employers should note that gifts in cash or monetary value vouchers are subject to PAYE/NI just like regular pay. Non-taxable benefits in kind must be reported via the P11D system, leading to a Class 1A National Insurance liability for the employer.
If a gift is immaterial, such as a single bottle of wine valued up to £50, it may qualify as non-taxable based on triviality. However, regular gifts or high-value gifts must be declared on form P11D unless the employee earns less than £8,500 per annum, in which case the tax liability and Class 1A National Insurance liability arise for the employer.
How to Entertain Customers
When employers entertain customers, potential customers, or other business contacts, they cannot deduct these expenses for tax purposes, except under special rules for specific businesses like hotels that provide entertainment in the ordinary course of their trade. In those cases, tax deductions are permitted.
Employers may also provide refreshments during product promotions or client meetings, as long as the primary purpose is not entertainment.
They cannot reclaim VAT on entertaining costs unless the event primarily serves staff (or, in limited cases, overseas customers), allowing VAT recovery only for employee attendees.
Entertaining includes any hospitality, such as concert tickets or executive box invitations for sporting events. Costs incurred for entertainment do not count as taxable benefits for employees attending as long as they are incurred wholly, exclusively, and necessarily in performing their duties.
However, if an employer recovers VAT on an entertainment item classified as staff entertainment, it may result in a taxable benefit for the employee unless the £150 annual function exemption applies.
If staff act as hosts for employer guests, this does not create a taxable benefit, but the incurred VAT becomes irrecoverable.
Subsistence
Employers can only claim meals as allowable expenses when associated with genuine business travel away from the normal base of operations. Generally, meals taken near home or regular business premises do not qualify.
How Many Payments Are Considered Under Suggestion Schemes?
Employers can make tax-free awards for suggestions as long as the scheme is open to all employees or a specific class of employees, and the suggestions relate to the employer’s activities. Suggestions made during meetings or in the course of an employee’s normal duties do not qualify.
For encouragement awards (for suggestions showing special effort or intrinsic merit), the limit is £25. For financial benefit awards (related to improvements that the employer adopts expecting financial benefits), the limit is half the expected financial benefit in the first year or one-tenth in the first five years, with an overall maximum of £5,000.
How to Avail Long Service Testimonial Awards
Awards marking at least twenty years of service with the same employer can be tax-free as long as they are not cash, readily convertible assets, or shares (though shares in the employer are permitted). The award must not exceed £50 for each year of service.
PAYE Settlement Agreements
Employers who expect to provide certain non-mainstream benefits (like occasional gifts) that would be taxable for employees can enter into a PAYE Settlement Agreement with HM Revenue & Customs.
This agreement allows employers to settle tax liabilities on behalf of employees, eliminating the need for entries on P11Ds and ensuring no further personal liability for those employees.
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