For some people, it is still too soon to talk about Christmas (my own belief is anything after bonfire night is fine), but when it comes to taxes, it is never too soon to talk about Christmas and unwanted presents from the taxman.
Most people are aware of the rules around Christmas parties. You can spend up to £150 per head at a 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.
The issue for this Christmas, as I am sure you can appreciate, is that having a Christmas party will either be against the Coronavirus rules or completely impractical to arrange in-line with the rules. Therefore, a lot of employers have been looking at virtual parties instead. While the thought of having to attend a Zoom meeting for “fun” might fill some employees with dread, the concern for tax advisors was whether these virtual parties would fall into the existing rules.
Although they have yet to update their guidance, HMRC have confirmed to ICAEW that they will indeed treat virtual Christmas parties as exempt employment benefits in line with their physical counterparts. This will cover “the cost of providing food, entertainment, equipment and other expenses which may be incurred in hosting a virtual event.” That’s the Christmas spirit!
It should be remembered that the rules for parties are actually broader than just Christmas. You can hold as many parties as you like if the aggregated cost per head is less than £150. For example, some employers will also hold a summer party or perhaps a party to celebrate the financial year end. 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).
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. Also, make sure you have a cut-off with the bar tab; if you stray over the £150 limit with a few rogue Bailey’s the whole function becomes taxable. Alternatively, make sure any extra drinks are paid from the business owners’ own pockets (good luck).
Someone should note which staff attends which parties when assessing the aggregates. I used to work with a tax partner who took photos of the staff on night out solely to have evidence of who was there for tax purposes, but that’s tax advisors for you. 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.
While they have been largely overlooked during the Coronavirus, 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.
If you decide the workforce have had enough of Zoom for 2020 you can instead send them gifts. Again, there are rules to be mindful off to avoid a tax bill:
- The cost must be £50 or less
- It isn’t a cash or a 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
But be careful, you must aggregate all gifts for the same purpose (i.e. Christmas 2020). So, if you give each employee a £30 turkey and £30 of wine, this would be a taxable benefit.
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 dangers involved than in a conversation about whether or not Die Hard is a Christmas movie (it’s not).
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.
