The Tax Implications Of Christmas Parties, Staff Gifts, and Trivial BenefitsWritten on December 5, 2023 by Kirk Rice LLP
We are often asked about the potential tax implications of throwing a Christmas party for employees and Christmas gifts. In this article we provide answers to some of these questions.
Christmas Parties
We are often asked about the potential tax implications of throwing a Christmas party for employees.
This question needs considering from two angles. The first is whether the cost would be an allowable expense for business tax purposes, the other being whether it would be a benefit taxable on the employees via their P11Ds. Whilst there is a “general rule” answer to both of these queries, there are several pitfalls to beware of, so I shall cover each question in detail.
Are Christmas parties an allowable expense for business tax purposes?
The general rule is that the cost of staff entertaining is tax deductible as long as it is not incidental to the entertaining of others. If you were to invite your suppliers and or customers to attend too, careful consideration would need to be taken when apportioning the costs pertaining to staff entertaining and supplier/customer entertaining, as the latter is not tax deductible.
The VAT recoverability rules also differ for staff entertainment and supplier/customer entertainment, so care should also be taken in this area.
Are Christmas parties taxable on my employees as a benefit?
This area has a lot more potential problems to look out for!
The general rule is that the party is not a taxable benefit as long as it is an annual event, open to all staff, and the total of all such annual events in a given tax year does not exceed £150 (inclusive of VAT, accommodation, and transport) per head. Now, let’s break that down and cover the potential pitfalls.
Annual event – pretty self-explanatory, such as a Christmas party or a summer BBQ. However, it must be a recurring event held each year instead of casual hospitality occurring at frequent intervals for the staff. It can also apply to online or virtual parties!
Open to all staff – Not all staff have to attend, but they all have to be invited. If you have more than one office location, you can arrange an event available to all employees generally at one location.
If you only offer the party to certain members of staff, it will be taxable on those staff members as a benefit.
Total costs do not exceed £150 per head – The £150 includes VAT.
Per head is the total headcount of attendees, including staff and their partners/family, if the invitation is extended to guests.
The event cost is from start to finish and includes transport costs to/from the event and accommodation costs if the employer provides these.
If the total cost exceeds £150 per head, the entire cost becomes a benefit, not just the amounts in excess of £150 per head.
If you have more than one annual event of this nature, the £150 per head is for the tax year, not per event. So if you had an annual summer BBQ, which cost £50 per head, and the Christmas party came to £125 per head, you can choose to use the £150 per head in the most tax efficient way; in this case, the whole £50 per head for the summer BBQ would be a taxable benefit for the employees in attendance and the Christmas party would be covered by the annual exemption.
Example:
Our Christmas party this year has come in at £160 per head (taking into account employees and guests). What should I do?
Essentially, you have two options here.
- The cost of the Christmas party, attributable to each staff member, will need to be included on their P11Ds (i.e. £320 if the staff member brought their spouse along). This will result in them paying tax on this amount as if it were normal employment earnings, likely dampening the festive spirit. The business will also be liable to pay 13.8% of the employer’s national insurance on the total benefit cost.
- As an employer, you can agree with HMRC that you will cover the tax and national insurance through a PAYE Settlement Agreement (PSA). This will increase the cost of the party to you as a business.
For example, you have a Christmas party, which costs £1,600 and has ten people in attendance. Each staff member in attendance is a basic rate taxpayer. With a PSA in place, the total cost to your business would be £2,276 (£1,600 grossed up for tax at 20% to £2,000 plus 13.8% employer’s national insurance).
In the same example, if all staff members were higher rate taxpayers, the total cost to the business would be £3,035 (£1,600 grossed up for tax at 40% to £2,667 plus 13.8% employer’s national insurance).
If there is no PSA in place, the total cost to the business would be £1,821 (£1,600 plus 13.8% employer’s Class 1A national insurance), and the staff would suffer the tax personally.
The deadline for applying for aPSA is 5 July, following the first tax year it applies to, so it’s important to keep track of these annual event costs during the tax year.
As you can see, there are many issues to be aware of when planning your festive fun!
Staff Gifts
Gifts provided to staff can also have tax implications. Cash gifts or vouchers exchangeable for cash will always be taxable on the employee like earnings. However, gifts classified as ‘trivial benefits’ are exempt from reporting.
Trivial Benefit Rules
You can provide your employees with non cash gifts or non cash vouchers costing £50 or less (including VAT) without any tax issues arising; providing the gift is unrelated to employment duties and not a service reward.
So you may wish to give employees a seasonal present costing less than £50, such as a turkey, a bottle of champagne, or a festive hamper to brighten the festive season!
Where non cash or non cash voucher gifts exceed £50 per employee, including VAT, these should be reported on P11D forms.
If you would like to discuss the tax implications of employee Christmas parties and gifts for both your business and staff or require any other taxation assistance, please email info@kirkrice.co.uk to arrange a call with one of our tax specialists. Kirk Rice offers a free no, obligation first meeting and fees and costs of work involved would be discussed. We do not carry out any work without your consent and agreement to fees.
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