As we approach that time of year where Christmas is getting closer and work Christmas parties are being finalised, we explore the tax and reporting obligations of employers when holding annual functions and parties.
The Income Tax (Earnings and Pensions) Act 2003 (S264 ITEPA 2003) details the income tax exemption for annual functions. Put simply, the exemption is not restricted only to Christmas parties, but any annual event during the tax year. To be exempt, the party, function or event must be:
- open to all your employees
- cost £150 per person or less
- occur annually, whether this is a Christmas party, or summer event
The Act states that the total value for an annual function which is exempt from Income Tax, and therefore doesn’t need reporting to HMRC, is £150 per head, and in the instance that more than one event is held within one tax year, the cost of both functions will remain exempt from income tax as long as the combined cost per person does not exceed £150 per head.
If the combined cost did exceed this limit, the benefit of the second function must be reported as such to HMRC, either by payrolling the benefit, or by submitting a P11D form for each employee who attended. Alternatively, the cost of the second function could be reported on a PAYE settlement agreement with the approval of HMRC, so the employee is not impacted by an additional tax benefit.
Remember – when calculating the cost of the function per head, the VAT and the cost of transport and / or accommodation (if the employer is providing it) must also be included).
An employer may wish to give employees a gift at Christmas as a token of goodwill. Here, the trivial benefits exemption (ITEPA 2003, s. 323A) can be utilised to ensure gifts remain tax free. Again, there are conditions that must be met for the exemption to apply:
- The cost of providing the benefit must not exceed £50.
- 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.
Get in touch
If you are currently finalising your Christmas party plans, and are unsure about the tax implications, we can help! Get in touch by emailing firstname.lastname@example.org and a member of the PM+M tax team will get back to you.