Businesses treating their staff to a festive party need to avoid falling foul of the legislation and ending up with a tax hangover, writes MARK PRYCE
It has been a tough year in many respects so it is only natural that many businesses will want to reward hard-working staff with a morale-boosting Christmas party. However, while there is usually no need to inform the tax authorities of such events, business leaders and directors need to avoid overspending and then having to report the tax implications to HMRC.
It is easy to fall foul of the legislation regarding exemptions and land staff with a share of the costs as a ‘benefit in kind’ (BIK).
To be exempt from tax and National Insurance (NI), parties or similar social functions – including online or virtual parties – must be open to all employees, be annual (such as a Christmas party or summer barbecue) and cost £150 or less per person.
The £150 limit, which has not been changed since 2003, includes the cost of the function and associated travel, such as taxis, or hotel accommodation, including VAT and is then divided by the total number of attendees not just the number of employees.
The limit is an exemption and not an allowance and the entire cost would be subject to tax and NI if the figure was exceeded, even by just £1.
Businesses need to take specialist tax advice if they feel the threshold is in danger of being exceeded and there are two courses of action.
Businesses can report the cost of the party to HMRC as a staff benefit in kind with staff paying tax on their share of the cost. However, that does not reflect well on the employer.
Alternatively, if a business struggles to avoid exceeding the limit, they can use a PAYE Settlement Agreement (called a PSA) which allows employers to make one annual payment to cover all the tax and NI due on minor, irregular or impracticable expenses or benefits for employees.
If spouses or partners are also invited to the party, it would trigger an extra £150 exemption limit.
Employers can also take advantage of HMRC ‘trivial benefits’ for which no reporting is required and tax or NI payable if conditions are met, to give a boost to staff, particularly at Christmas.
A trivial benefit should cost £50 or less to provide, is neither cash nor a cash voucher, is not a reward for work nor performance and is not in the terms of a contract.
Mark Pryce, is head of corporate tax in Scotland for Azets
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