Enjoy the benefits of the party season
by Samantha O’Sullivan – Policy lead, CIPP (Chartered Institute of Payroll Professionals)
The festive season wouldn’t be the same without presents and parties, so make sure you know what the tax implications are when it comes to organising functions and gifts for your employees.
It’s that time of year when employees can look forward to an extended break and, if they’re lucky, a Christmas party But what do employers need to be aware of when it comes to providing their employees with benefits over the festive period?
Party on
Let’s start with the parties. A common perk for employees is an invitation to a Christmas jolly. This allows companies to get all staff members together to celebrate the festive season. But what do employers need to be aware of to ensure this perk doesn’t become taxing on their employees?
How much can an employer spend?
A tax exemption is available for annual functions, up to £150 per head. This is specified at section 264 of Income Tax (Earnings and Pensions) Act (ITEPA) 2003.
The top takeaways here are:
- this is an exemption, not an allowance
- the value is truly per head, and not limited to employees only, so can include partners, children and so on.
Is this limited to one party a year?
The exemption applies to “parties and functions” (which I will refer to as an event/events), so more than one event can occur. The top takeaways here are, in a tax year:
- if only one event takes place, the cost per head must not exceed £150
- if multiple events take place (for example, a summer barbeque and a Christmas party) the cost per head must not exceed £150 for both events.
What is covered by the exemption?
The cost per head of the event must include:
- the value of the event itself
- any transport provided
- any accommodation provided
- any value-added tax (VAT) incurred on any of the above.
Going above £150
If multiple events take place and the cost per head exceeds £150 combined, then only one of the events can be covered by the exemption. Using the above example to highlight this, if the summer barbeque cost £50 per head, and the Christmas party cost £110 per head, the employer would be savvy to use the exemption for the Christmas party, and the summer barbeque would need to be dealt with separately.
Gifts that keep on giving
If parties aren’t your thing, how about a gift?
If employers wish to provide a gift to their employees to celebrate the festivities, then utilising the trivial benefit tax exemption may be for you. This exemption is specified at section 323a of ITEPA 2003.
There are four conditions that must be met for the exemption to apply. These conditions are:
- the benefit isn’t cash or a cash voucher
- the cost of the benefit doesn’t exceed £50
- the benefit isn’t provided as part of any contractual obligation (including under salary sacrifice arrangements)
- the benefit isn’t provided in recognition of services performed, or anticipated to be performed, by the employee.
There is no limit on the number of trivial benefits provided to employees throughout the tax year. Typically, the benefit would be triggered by an event, for example, a birthday, Christmas or the birth of a child. However, for directors of close companies, the rules are slightly different, in that they can’t receive trivial benefits of more than £300 in a tax year.
By using the trivial benefit exemption, you could provide your employees with a turkey ready for Christmas dinner, a gift hamper, bottles of wine or a magazine subscription. The possibilities are endless, providing you meet the above four conditions.
Hey big spenders!
If you really want to spoil your employees this festive season, and wish to spend over the trivial benefit exemption of £50, what happens then?
Let’s explore what options employers have when it comes to events or gifts exceeding the above exemptions.
The first option would be to report the cost of the event or gift to HMRC as a taxable benefit in kind. This would be done via a P11d, or through real-time information if you’ve registered to payroll benefits. This results in a tax charge for the employee, and a class 1A National Insurance (NI) charge for the employer.
I’m sure employers wouldn’t want their employees to pick up the tax bill of attending an event or receiving a Christmas gift, so the second option would be for employers to have the event or gifts covered on a pay-as-you-earn (PAYE) settlement agreement (PSA). A PSA allows employers to cover the tax and NI due on minor, irregular or impracticable expenses or benefits provided to employees. By choosing this option, the employer does need to be mindful that this will cost them more in the long run, as they’ll be covering the tax due, based on the employee’s rate of income tax.
