With advent upon us, let me spread festive cheer by reminding you of the various tax traps you can fall into at a Christmas time.
Christmas Parties
Let’s start with Christmas parties. You can spend up to £150 per head at an annual party without incurring any employment taxes and the cost is tax deductible for the business. The party can be broken down into individual locations (e.g. Swindon and Slough branches having separate dos) or departments (e.g. warehouse staff and office staff), so long as all members of staff can go to one of them. However, here’s the first trap – the £150 is an annual limit. If you’ve already spent £100 per head on your big summer party, you can only spend £50 per head to avoid a tax headache (to go with the headache from drinking too much of the “free” booze).
You can hold as many parties as you like if the aggregated cost per head is less than £150. However, the parties must be annual – they cannot be one-off events. The assessment then looks at all the parties in aggregate. So, if the Christmas party cost £80 per head and the summer do was £60 per head, there would be no tax consequence. However, if both were £80 (i.e. a total of £160), then one of the parties would be taxable (it does not matter that there is still an extra £70 to spend per head -it is an exemption as opposed to an allowance).
Take care with the £150 exemption. This is inclusive of VAT regardless of whether you recover the VAT (which is typically allowed for staff-only entertainment) and the actual cost to the employer is less. When reviewing the books and records you might need to add the VAT back on to ensure you’re not exceeding the £150 per head threshold.
Also, the total cost to consider is the cost of the party itself plus the associated costs, for example transport and accommodation. So you might spend £100 per head on the party, but then £60 on transport and accommodation for the same event. This event would therefore breach the £150 per head exemption.
The per head thing can be quite important as strictly speaking you need to monitor which employees attend to ensure the threshold is not exceeded. You might lay on a party for your ten members of staff costing a total of £1,500 thinking you are safe. However, the accountant is so busy dealing with the year-end he does not attend and now your cost is £166 per head. It is therefore important for someone to note which staff attends which parties when assessing the aggregates. I used to work with a tax partner who took photos of the staff at parties solely to have evidence of who was there for tax purposes, but that’s tax advisors for you.
Also, make sure you have a cut-off with the bar tab; if you stray over the £150 limit with a few rogue Baileys the whole function becomes taxable. Alternatively, make sure any extra drinks are paid from the business owners’ own pockets (good luck).
Interestingly, bringing a spouse, partner or another guest is fine (again, if it is below £150 per person) but any customers or freelancers would be business entertaining and the cost would not be tax deductible. If the party is aimed at being a networking event for which you invite a lot of customers, potential customers and other contacts, none of the costs would qualify for the exemption even if staff do attend.
Company directors who work for themselves can still have a tax-deductible Christmas party as they are an employee of the company (as director). They can take their spouse along too. A self-employed person does not get this perk as they are not an employee. Sorry.
Going back to the £150 threshold, if this is exceeded there will be a taxable benefit for the member of staff. Now, it would not be very Christmassy if an employer paid for a lovely Christmas dinner only for the employee to receive a tax bill the following year. It is therefore common for the employer to arrange a PAYE Settlement Agreement (PSA) to settle the taxes on behalf of their employees should this happen.
Note, that while Covid lingers, virtual parties with accompanying food/drink supplied would be treated as a party for this purpose.
Gifts
A lot of employers like to give their employees a little surprise at Christmas time.
Some employers like to give a cash bonus to their employees. I expect this is less common these days, but if you actually give the employee cash, you will still need to report this in the payslip as a net payment and gross-up accordingly. This can be surprisingly expensive and you might have not thought about student loans and pension deductions, which can amplify the cost to the employer.
In general, HMRC have rules on gifts to be mindful of to avoid a tax bill:
- The cost must be £50 or less
- It isn’t a cash or a cash voucher
- It isn’t a reward for their work or performance (i.e. a bonus for meeting a target)
- It isn’t in the terms of the employee’s contract
The definition of cash voucher is one that can be exchanged for cash. While most vouchers can be sold on online marketplaces, this is where the supplier of the voucher will exchange it for cash. So check the terms and conditions of any voucher before you buy it for staff.
Also, be careful with the £50 limit. You must aggregate all gifts for the same purpose (i.e. Christmas 2021). So, if you give each employee a £30 turkey and £30 of wine, this would be taxable as the aggregate exceeds £50.
The final thing to say on gifts is that different rules apply for gifts to customers or suppliers (including freelancers). While the limit is also £50 (which, in this case, is an annual limit per person), it also must have a conspicuous logo of the business and cannot be food, alcohol, tobacco or vouchers. So you can’t send your freelancers turkeys even if you emboss the company logo on it.
So, go carefully when planning your Christmas festivities and be sure to speak to an accountant if you are unsure. There are more traps than a home occupied solely by Kevin McCallister.
These are general examples and not formal advice. Also, tax law is constantly changing, so the issues discussed here might now be out of date. Each taxpayer is different; therefore, we recommend that you consider your options carefully with an expert before taking any action.
If you want to discuss any of the above, or any other matter, just give us a call on 020 7183 3383 or email info@kma-spotlight.com.
