The festive season is almost upon us, so it’s time to look at the tax treatment of providing a staff 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 is a reminder of the rules for the tax year 2022/23.
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 or social function
- be provided for all the employer’s employees, or all the employees at a particular location;
- 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 barbecue, for example. The event does not have to follow the same format each year; what is important is that every year you hold a Christmas party.
Two or more functions
If there are multiple annual events, they will be exempt as long as the combined cost is no more than £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.
Calculating the cost
The total cost of the party includes food, drink, entertainment, taxis home, overnight accommodation etc. It also includes any VAT that was charged even if this has subsequently been recovered by the employer.
A taxable benefit in kind will arise if either the limit is exceeded, or the function is not open to all staff or it is not an annual function.
It is important to be aware that the £150 per head limit is an exemption not an allowance – go over £150 and the full cost becomes taxable.
The benefit must be reported on each employee’s form P11D. The employee will pay income tax on the benefit, and the employer will be charged Class 1A national insurance.
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.