Mindful of the approaching Christmas and New Year festivities, it is timely to review the tax rules concerned with the provision of Christmas parties, other annual parties and gifts for employees.
The cost of entertaining employees is deductible for corporation tax, as long as it is available to all staff and not incidental to the entertainment of others. If customers are invited to the event then it will be necessary to consider a suitable apportionment of cost, to disallow the customer element for corporation tax purposes.
There is an exemption from income tax and national insurance contributions on the benefit for employees, where an employer provides a Christmas party or annual party or similar function for employees if three conditions are met.
- The cost per head of the event is no more than £150
- The event is open to all employees
- It is annual event such as a Christmas party, summer ball or barbecue
If the three conditions are met the employer will not be required to report to HMRC the provision of the benefit involved. The problem for the employer as always is to ensure that the detail requirements are met to ensure either that there is no chargeable benefit or any chargeable benefit is minimised.
The £150 limit per head
It is important to be clear that the £150 limit is not an allowance that can be offset against the cost of providing such events, where they exceed £150 whether there is one or event or a number of events.
Where an employer provides an annual event during the tax year which is open to all employees and does not cost more than £150 per head, then there is no chargeable benefit on the employee and the employer does not have to report the details of the benefit to HMRC.
Where an employer provides two or more such annual events during the tax year each of which costs no more than £150 per head and which the total of the events does not exceed £150, then there is no chargeable benefit on the employee and no need for the employer to report the benefit provided to HMRC.
Where the combined cost of two or more events exceeds £150 then the exemption can be applied to the combination of events which best utilises the limit of £150. The Greenhill Adventure Garage Limited which prepares vehicles for long adventure safari type trips as well as specialist vehicles for use in hostile environments holds three functions during the tax year which are available to all it’s employees.
The Christmas party costs £95 per head, while the summer ball costs £85 per head, and the summer solstice barbecue costs £50 per head. Because the combined total of the three events is £230 which exceeds the limit of £150 per head it is necessary to consider whether there is a combination of events which best utilises the exemption.
The Christmas party and summer ball have a combined cost of £180 per head, the Christmas party and barbecue have a combined cost of £145. The combined cost of the summer ball and barbecue is £135. Clearly the best combination to utilise the exemption, is that of the Christmas party and barbecue.
This means that the employer has to report a benefit in kind of £85 for each employee attending the summer barbecue. Where the employee takes a guest such as wife or partner then the reportable benefit in kind will double to £170.
Where a business has more than one location, then an annual event which is open to all staff at that location will be eligible for the exemption. Where the business has it’s employee’s organised into separate department then where a separate party is held for each department, it will also be eligible for the exemption as long as each of the companies employee’s is entitled to attend one of these events.
For some functions it may not be possible to accurately determine how many people went to an event. A company must exercise reasonable care when calculating the cost per head for an event. If this is not done then the company could face penalties where this leads to a loss of tax.
For some functions it may be difficult to determine the number of people who attend, especially where people drift in and out throughout the event. To avoid penalties it will be necessary to arrive at a careful estimate, and to keep the calculation of the estimate to show that reasonable care was taken in arriving at the cost per head for that event.
When calculating the cost per head of a function the costs used must include the cost of the venue, entertainment, food, drinks and other associated costs which include transport to and from the event where the company pays for this, as well as accommodation that is for the whole of the event from beginning to end.
VAT must be included in the calculation even where this is fully recoverable by the company. The total cost of the event is then divided by the total number of people attending the event. The total number of people includes not just employees but also guests.
VAT is fully recoverable on the cost of the function as it is considered by HMRC to be staff welfare costs and not entertaining costs. Where the company is also entertaining UK clients as well as employees then it will be necessary to disallow part of the VAT incurred as input tax.
This disallowance should be calculated as a proportion of the number of clients to staff which attend the event. Where the event is provided for customers and staff are there to attend to those customers, then the whole event will be considered to be entertainment and the VAT incurred cannot be claimed.
Where the function is mainly for the directors and so excludes other employees then VAT input tax cannot be claimed.
Reporting to HMRC
Where an employee earns at a rate of less than £8,500 per year the employer has no need to report the benefit to HMRC, and there will be no tax or NIC’s to pay.
For all company directors regardless of earnings level and employees who earn at a rate of more than £8,500 per year any benefit arising will need to be reported by the employer on HMRC form P11D section M.
The employer will also need to pay Class 1 A national insurance contributions, on the value of the benefit at the current rate of 13.8% for 2012/2013.
The employee will not suffer a national insurance contribution charge on the benefit, but the employee will be chargeable to income tax on the value of the benefit provided. The employer can enter a Pay As You Earn Settlement Agreement (PSA) with HMRC so that the employer can pay the tax due on the on the employee’s benefit.
Where a PSA is used the employer will also be chargeable to Class 1B national insurance contributions on the value of the amounts included on the PSA, which would normally be chargeable to Class 1 or Class 1A contributions on the value of the tax which is payable on the PSA.
Trivial Gifts
Christmas gifts paid to employees in the form of cash and or vouchers will be taxable along with other earnings and treated as a normal pay item and be subject to tax and national insurance deductions.
If the company gives an employee a seasonal present such as a Christmas turkey, wine or chocolates, then HMRC will consider it to be a trivial gift.
HMRC do not consider trivial gifts to be taxable, and will allow such a gift as a deductible expense for corporation tax purposes. HMRC will not say what they regard as the monetary limit for a trivial gift.
A gift of less than £50 in value will usually be accepted by HMRC as a trivial gift. Any gift over this amount should be reported on the PIID in the normal way.
Robert Lillycrop FCA, CTA independent accounting specialist, author of CCH Tax Digest on HMRC powers
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