As Christmas approaches and employers begin finalising their festive plans, we look at the tax and reporting obligations associated with annual parties, functions and employee gifts.
The tax rules include an income tax exemption for annual functions. This isn’t restricted to Christmas parties and can apply to other annual events held during the tax year.
For the exemption to apply, the party, function or event must:
- be open to all employees
- cost £150 per person or less (inc. VAT)
- be an annual event, such as a Christmas party or summer barbecue
The £150 per head figure is an exemption rather than an allowance. This means that if a single event costs more than £150 per head, the full cost is taxable, not just the amount above £150.
Where an employer holds more than one annual event during the same tax year, the exemption can apply to the event, or combination of events, that makes best use of the £150 limit. If the combined cost is more than £150 per head, any events that cannot be covered by the exemption will be taxable in full.
Where an event is taxable, it will need to be reported to HMRC, with the employer also liable for Class 1A National Insurance. Depending on the employer’s arrangements, the benefit may be dealt with through payroll, reported on a P11D, or included within a PAYE Settlement Agreement agreed with HMRC.
Remember, when calculating the cost of a function per head, VAT and the cost of transport and/or accommodation provided by the employer to enable employees to attend must also be included.
The exemption can also apply to online or virtual annual events.
Christmas gifts
An employer may also wish to give employees a Christmas gift as a token of goodwill. The ‘trivial benefits’ exemption can apply to qualifying gifts, allowing them to be provided tax-free.
For the exemption to apply:
- The cost of providing the benefit must not exceed £50 (including VAT)
- The benefit must not be cash or a cash voucher
- The employee must not be contractually entitled to the benefit
- The benefit must not be provided in recognition of services performed, or to be performed, by the employee
If all of these conditions are met, there is no tax or National Insurance to pay and the benefit does not need to be reported to HMRC.
There is an additional limit for directors of ‘close’ companies, where the total value of trivial benefits received cannot exceed £300 in a tax year.
Get in touch
If you’re finalising your Christmas party plans or considering festive gifts for employees and are unsure about the tax implications, we can help. Get in touch by emailing enquiries@pmm.co.uk and a member of the PM+M tax team will get back to you.
