Sarah Bradford explains how to utilise a tax exemption to prevent a benefit-in-kind charge arising in respect of the annual Christmas party.
Many employers provide a Christmas party or lunch for employees. However, without consideration of the tax implications, the event may trigger unwanted tax liabilities for the employer and the employee. This article explains how that unfortunate outcome can be avoided.
Limited tax exemption
The tax legislation contains a limited exemption for annual parties and functions. You can avoid an unwanted tax bill by ensuring that your Christmas party meets the terms of the exemption.
As with most exemptions, there are conditions to be met. To fall within the scope of the exemption, the event must:
- be an annual party of similar function;
- be provided for all the employer’s employees, or all the employees at a particular location;
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not cost more than £150 per head, or where there is more than one annual event, over £150 per head in aggregate.
Annual events only
The first point to note is that the exemption only applies to annual events. It does not apply if the event is a one-off event. This condition is easily overlooked.
An annual event is one that is held once a year on a recurring basis. This may be an annual Christmas party or an annual summer ball, for example. Consequently, if you always hold a Christmas party, your event will tick this box. The event does not have to follow the same format each year; what is important is that every year you hold a Christmas party.
However, if you do not normally hold a Christmas party but decide to hold one this year as a one-off event, this condition will not be met. Likewise, if you hold an event to celebrate a particular occasion (e.g., a 10th anniversary), that event cannot be an annual event and will fall outside the scope of the exemption. As a result, a tax charge will arise under the benefit-in-kind legislation. The employer will also suffer a Class 1A National Insurance contributions (NICs) charge.
Open to all employees
If the event is an annual event, it will only fall within the scope of the exemption if it is open to all employees, or where you operate from more than one site or have different departments, to all the employees at a particular location. Consequently, your event will qualify if it is open to the whole workforce. Departmental events and those for employees at particular sites will also qualify. Note, it is not necessary for all the employees to attend; what is important is that all those at the company, location or in the department (as appropriate) are invited to attend.
Events for particular categories of employees do not qualify, for example, a lunch for senior managers only.
Cost capped at £150 per head
A monetary cap applies; the exemption is only available if the cost of the party does not exceed £150 per head. The wording here is important as the limit applies ‘per head’, not ‘per employee’. Consequently, where employees are allowed to bring a guest, the guests are taken into account in working out the cost per head figure.
The cost per head is simply the total cost of providing the party or function divided by the number of people attending. The total cost includes the cost of the party or function and the cost of transport or accommodation that is provided in conjunction with the party or function. Where VAT is charged, this is included in the total cost figure, even if it is subsequently recovered by the employer.
The total number of people attending the function is just that and includes both employees and guests.
It is important to realise that the £150 cost per head figure is an exemption, not an allowance; that is to say, to fall within the terms of the exemption, the cost per head figure must be £150 per head or less, rather than the first £150 being tax-free. Where the cost per head figure is more than £150 per head, the full amount is taxable, not just the excess over £150.
If you only hold one annual function for staff each year, applying the exemption is straightforward. As long as the event is open to all employees, the tax exemption will apply if the cost per head is £150 or less.
Example 1: One annual event
Holly Ltd holds a Christmas party for their employees each year. The event is open to all employees and employees are allowed to bring a guest. The party is attended by 25 employees and 21 guests.
The event costs £2,760. The company also provide employees with taxis to and from the venue at a total cost of £500. The figures include VAT.
The total cost of the function is £3,260 (£2,760 + £500).
The function is attended by 46 people (i.e., 25 employees and 21 guests).
Consequently, the cost per head is £70.89.
If this is the only annual function in the year, the exemption will apply as the cost per head figure is less than the permitted £150.
More than one annual function
If you provide more than one annual function for staff each year, the extent to which the exemption is available will depend on the cost per head figure for each function. There is a tax-free pot of £150 available, which can only be used for ‘whole’ functions and the exemption will apply to those functions where the total combined cost per head is not more than £150.
However, if the total cost per head figure for all the functions exceeds £150 per head, you will need to decide how best to use the exemption. The starting point is to work out the cost per head for each function. Remember, as the exemption is not an allowance, it can only be used to shelter whole events.
If none of the events is open to guests or all the events are open to guests, the aim is to keep the cost per head figure (and thus the taxable amount) of the functions falling outside the exemption to a minimum.
Example 2: Two annual events
Ivy Ltd holds a Christmas party and a summer barbecue each year. The events are open to employees only. The Christmas party costs £120 per head and the summer barbecue costs £50 per head.
As the aggregate cost per head figure of £170 exceeds the permitted cost per head figure of £150, the exemption will not apply to both events. The exemption is best used against the Christmas party (£120 per head), leaving the summer barbecue (£50) outside the exemption. As the exemption is not an allowance, the £30 of the £150 figure not allocated to the Christmas party cannot be set against the summer barbecue, which is taxable in full.
The position is complicated where the employee is able to bring a guest to some functions and not to others; where the event is taxable, the employee will be taxed on both their attendance and that of their guests. This may mean the best course of action is not to use the exemption to shelter the events with the highest cost per head figure, as illustrated by the following example.
Example 3: Allocating the exemption
Mistletoe Ltd holds two annual events:
- a Christmas party costing £80 per head; and
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a Halloween ball costing £100 per head.
Employees can bring a guest to the Christmas party, but the Halloween ball is open to employees only. As the aggregate cost per head at £180 exceeds the permitted £150, the exemption will only apply to one event.
At first sight, it may seem better to apply the exemption to the Halloween ball, as this has the highest cost per head figure. However, as the employee is permitted to bring a guest to the Christmas party, if this is left in charge, the taxable amount (assuming an employee brings a guest) will be £160 as the employee will be taxed on both their attendance and that of their guest. By contrast, if the Halloween ball is left in charge, the taxable amount will only be £100 as this event is only open to employees.
Consequently, to minimise the tax charge, the exemption is best used against the Halloween ball.
Practical tip
If your event falls outside the scope of the exemption, consider using a PAYE settlement agreement to meet the resulting tax liability on behalf of your employees.
