Tax implications on staff parties and benefits

We would like to share with you the tax implications around staff parties and gifts/ trivial benefits for staff.

STAFF SOCIAL PARTIES

What is exempt?

Staff entertaining is usually fully tax deductible against business taxable profits if the event meets all of the following:

• an annual party or social function, such as a Christmas party
• it is open to all employees (or all employees based at one location)
• the cost does not exceed £150 per head
• wholly and exclusively for the purposes of the business and not incidental to customer entertainment.

HMRC have confirmed that virtual Christmas parties are eligible for the annual function exemption.

Two or more functions

If there are multiple annual events, they will still be exempt as long as the combined cost is no more than £150 per head.

If you’ve already used up the £150 exemption on an event, you’ll have to report and pay tax on the full costs of any additional events, even if they cost less than £150 per head on their own.

Is it an allowable expense?

Client entertaining is not an allowable expense for corporation tax purposes. However, the cost of employee entertaining is allowable, and therefore the cost of the staff Christmas party can be deducted.

VAT implications

Once again it is essential that such a party is for staff entertainment and therefore there is a legitimate business reason i.e., to thank staff and reward them with a party / event.

Circumstances where you can claim input VAT:

• Entertaining your employees at your Christmas party, and this includes the directors of the business if they are also attending the party with staff.

Circumstances where you cannot claim input VAT:

• If the directors of the business wish to hold their own Christmas event, then the VAT incurred is not input tax and cannot be recovered. This is because HMRC doesn’t recognise such an event as being for business purposes. The party needs to be strictly commercial, i.e., to thank your staff for all their hard work throughout the year.
• The input tax is also not recoverable on any clients you invite, former employees, or spouses/ partners of your staff. You can invite non-employees, but you can only recover the input tax on your staff and will therefore need to identify the proportion of people for which you can recover the input tax.
• The same rule applies to other similar events throughout the year, such as team building exercises and staff get togethers. HMRC clearly recognises the importance of rewarding staff with a party at Christmas, and at other points throughout the year, and how bringing a team together can motivate employees and be hugely beneficial to the running of your company and retention of employees.

Reporting obligations

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.

Please be aware that the £150 per head limit (including VAT, cost of transport / accommodation etc.) is an exemption not an allowance – even just a penny over the £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.

When calculating the cost per head, you need to consider the total cost and the total number of people (including non-employees) who attend the event to calculate an average cost per person.

Alternatively, the employer can apply to pay the grossed-up tax through a PAYE Settlement Agreement (PSA).

GIFTS AND TRIVIAL BENEFITS FOR STAFF

Seasonal gifts

The employer may wish to give employees a seasonal present, such as a bottle of wine, or a box of chocolates.

Broadly, the gift should not be:

• Worth more than £50 (VAT inclusive)
• Cash or a cash voucher
• Part of any contractual obligation
• Provided in recognition of specific employment duties

If these limits are exceeded, then the entire value of the gift is taxable and not just the excess.

You cannot receive trivial benefits worth more than £300 in a tax year if you’re the director of a ‘close’ company. A close company is a limited company that’s run by 5 or fewer shareholders.

Gifts not meeting these conditions, are taxed in the normal way – via P11D, PAYE Settlement Agreement (PSA) or taxed through the payroll.

Cash bonuses & vouchers

Christmas presents paid in cash to staff will be taxable as earnings in the normal way (subject to tax and national insurance). The same tax treatment also applies to vouchers exchangeable for cash, with the employee taxed on the full value of the voucher.

Vouchers exchangeable for goods and services only (non-cash vouchers) are also taxable and must be reported on the employee’s form P11D. Class 1 national insurance will normally need to be deducted through the payroll.

Make sure you tell your accountant or the person who prepares the payroll, so they can report the correct figures to HMRC.

Third parties

Employees may receive gifts from third parties as part of their employment. As long as the gift does not exceed £250 in cost, it should not be taxable for the employee.

Record keeping

Employers must take reasonable care to calculate the annual cost per head of events. When a failure to take reasonable care leads to a loss of tax, penalties will apply. It is recommended to keep sufficient records to prove to HMRC, if required to do so, the numbers attending any event so that the cost per head can be calculated.

Any further questions you may have, please speak to your bookkeeper who will be able to support you.