As we begin to plan for the festive season it is worth checking in advance that no adverse tax charges will arise on parties and gifts provided for staff. Where expenditure is planned in advance this can be effectively managed in line with the tax breaks available.
The £150 limit is generally known by employers, but what does this apply to? The £150 is a per head limit for annual functions and not per employee. So when employees’ spouses and partners also attend the event you can budget for £300 per couple within the concession. If the limit is exceeded then the whole cost of the event and not merely the excess is subject to tax and NIC.
The limit applies to annual functions only, so a one-off event to celebrate the company’s 10th anniversary will not be covered. Also, where you have more than one annual function (e.g. Christmas party and summer ball) then the combined total of both events cannot exceed £150 per head. If the cost per head was £80 at each event then only one would fall into the concession and the other would be taxable in full.
The cost of the event not only includes function room hire, food and drink but also taxis home, suit hire and any accommodation provided.
There is no distinction between employers here, so personal service companies are also able to take full advantage of this concession. A point that is often overlooked.
There is also a tax concession for gifts provided to staff which can be classed as trivial benefits. In order to meet the definition of trivial, the gifts cannot be cash or cash-like (e.g. store vouchers) and not considered a reward for duties – i.e. not linked to performance or results.
There is unfortunately no statutory definition of trivial as, while there were plans to introduce a £50 limit in April 2015, this was delayed by the Government. Typically, HMRC accept gifts such as bottles of wine or boxes of chocolates as within the trivial exemption, but care needs to be taken with larger gifts such as hampers.
We have routinely been able to agree gift values of up to £40 with local HMRC officers, but it should not be assumed that this is the case if prior agreement has not been obtained in your own case.
Hopefully the £50 limit will be reconsidered from April 2016, but for this year we are left with the current imprecise definitions that HMRC have published. If the value of gifts exceed any agreed limit for trivial benefits then they are taxable in full and not just on the excess.
How to settle any tax?
If you do exceed the concessions on parties and gifts then employers typically look to settle the tax themselves on a grossed up basis through a PAYE Settlement Agreement or PSA. The scope of the PSA needs to be agreed in advance but the actual numbers do not have to be submitted until after the end of the tax year.
The cost of this can be expensive with effective rates of tax exceeding 80% for higher rate tax payers typically applying, albeit that the payment will be deductible for corporation tax purposes.
Other planning ideas
It is possible for Christmas parties to be combined with training events and conferences so that only the additional cost of the entertainment falls into staff entertaining and not the full cost of the event. Care does need to be taken that the underlying training or conference is itself allowable and that agendas, invites etc. are available in case of later HMRC enquiry.
This is more common in geographically diverse organisations where it is difficult for staff to meet up and formal events are often required. Do not think that this is an excuse to book a weekend at the Alton Towers Hotel and claim the costs are allowable. HMRC will scrutinise such costs in great detail and advice should be sought prior to the event if such an argument is to be considered.
If you have any queries about any of the issues raised in this article then please contact your usual Moore Stephens representative.
Business Tax team
Wealth Management team