Sarah Bradford highlights some tax traps to avoid when providing staff with a tax-free Christmas party.
Employers often provide staff with a Christmas party. When planning the event, it is important to ensure that the tax implications are considered alongside the venue, the entertainment and the food.
While the tax legislation does contain an exemption that allows certain events to be provided without a tax bill accompanying any post-event hangover, the exemption is conditional on certain conditions being met. This article aims to explain the conditions, and to highlight traps that may catch the unwary.
Nature of the exemption
A tax exemption is available for annual parties and functions which are provided for an employer’s employees generally, or those at a particular location.
Where only one such event is held in the tax year, no tax liability arises as long as the cost is not more than £150 per head. An employer can hold more than one annual event each year within the scope of the exemption, provided that the aggregate cost is not more than £150 per head.
There are several traps for employers to avoid:
1: Annual events only
A peculiarity of the exemption is that it applies to annual events only. Thus, an event will only be able to benefit from the exemption if it is held every year. One-off events fall outside the scope of the exemption, even if the cost per head figure is within the £150 limit.
Consequently, if you hold a Christmas party every year, as long as the other necessary conditions are met, your 2023 Christmas party will be tax-free. However, if you do not normally hold a Christmas party but decide to hold one this year, a tax charge will arise under the benefit-in-kind legislation – the exemption will not be available as the event is not an annual event. Any other one-off events, such as a ball to celebrate a 10-year anniversary, are similarly taxable.
2: Open to all employees
The event must be inclusive and open to all employees to benefit from the exemption. Where the business is operated over multiple sites or organised into different departments, events that are held for employees at a particular location or departmental events will qualify if all the employees at that location or in that department are eligible to attend (and provided the other necessary conditions are also met).
Events for directors or managers only do not meet the ‘all employee’ condition and consequently fall outside the scope of the exemption. Where such events are held, a tax charge will arise under the benefit-in-kind rules.
3: £150 is an exemption not an allowance
Christmas and other parties only qualify for the exemption if the cost per head (or aggregate cost per head where there is more than one annual function in the tax year) is £150 or less. It is important to realise that this is not an allowance; rather than the first £150 per head being tax-free, the exemption only applies if the total cost of the event (or events in aggregate) is £150 per head or less.
The cost per head figure is simply found by dividing the total cost of the event by the number of people attending (including both employees and guests).
Example 1: Christmas party – cost per head
A Ltd holds a Christmas party each year. The 2023 Christmas costs £10,332. The party is attended by 69 employees and 54 guests – a total of 123 people. The cost per head is £84 per head (£10,332 ÷ 123).
If this is the only annual event in the tax year and the other conditions are met, it will fall within the scope of the exemption.
4: Overlooking VAT and incidental costs
When calculating the cost per head figure, it is important to include all the relevant costs. This includes any VAT incurred, even if this is subsequently recovered. Any incidental costs, such as the provision of overnight accommodation at the venue or transport to and from the venue, must also be taken into account.
It is important that these costs are not overlooked when planning the event, as a failure to include them in the calculation may mean the event does not come within the £150 per head figure.
Example 2: Over the limit
B Ltd aims to ensure that their 2023 Christmas party comes within the scope of the exemption. The total cost of the event is £5,180, and it is attended by 35 people in total. The cost per head figure is £148, which is within the permitted £150 per head limit.
However, in a gesture of goodwill, the company decides at the last minute to provide transport to and from the event. This costs an additional £700. They do not take the impact of providing the transport into account in their cost-per-head calculations. This is a mistake.
The provision of the transport increases the total cost of the event to £5,880 and the cost per head figure to £168 per head. As this exceeds the permitted £150 per head, the exemption does not apply and the employees are taxed on a benefit with a value of £168 per person (or £336 if the employee brings a guest).
5: Not taking account of guests where there are multiple events
If there are two or more annual events each year that may potentially benefit from the exemption, the employer can choose how they use the exemption. The exemption can only shelter whole events.
However, allocating the exemption to events to achieve the best possible result will not always be straightforward as the position is complicated if the employees are able to bring a guest to some but not all of the events. If an event falls outside the scope of the exemption and the employee brings a guest, the employee will be taxed on their attendance and also their guest.
Example 3: Don’t forget the guests!
C Ltd holds three annual events each year – a Christmas party, an anniversary dinner and a summer party. The Christmas party and the anniversary dinner are only open to employees, but employees can bring a guest to the summer party.
The Christmas party costs £60 per head, the anniversary dinner costs £85 per head and the summer party costs £45 per head. The aggregate cost is £190 per head, meaning that it is not possible for all events to be enjoyed tax-free.
At first sight, it would seem that allocating the exemption to the Christmas party and the anniversary dinner (i.e., an aggregate cost of £145 per head) would be the best use of the exemption, leaving the summer party as a taxable event. However, this does not take account of the fact that as employees can bring a guest, the taxable benefit for the summer party would be £90, not £45 as the employee is taxed on their attendance and that of their guest. This is more than the taxable value of the Christmas party at £60 per head. When guests’ attendance is taken into account, the exemption is best used against the anniversary dinner and the summer party (a total cost of £130 per head), leaving the Christmas party as a taxable benefit. The remaining £20 of the exemption cannot be used to reduce the amount charged to tax in respect of the Christmas party to £40 per head – the event is either fully exempt or fully chargeable.
5: Losing employee goodwill by failing to consider a PSA
The goodwill nature of a Christmas or other party is somewhat diminished if the employee is left with a tax bill.
To avoid this outcome and preserve the Christmas spirit, consider including any events which fall outside the exemption within a PAYE settlement agreement (PSA) and meeting the associated tax liability on your employees’ behalf.
Practical tip
Make sure you avoid the above traps to ensure that your 2023 Christmas party remains tax-free.
