This year will be the first in a while for many businesses to go all out on their Christmas party.
Fortunately, HMRC offers a special tax break under certain conditions, meaning you don’t have to hold back this year.
Read on to find out everything you need to know for this Christmas.
Expenses and benefits: parties
There are strict rules around reporting extra benefits that employers give to employees as a benefit in kind to make sure everything is transparent and the relevant taxes are paid. However, there is an exception for social functions and parties.
Under the annual function exemption, businesses do not have to report the cost of an event to HMRC or pay tax and National Insurance if:
- the party is open to all employees
- it is an annual event, such as a Christmas party
- the event costs £150 or less per person.
Spouses and civil partners of employees can be invited, as well as customers. However, if the number of customers exceeds the number of employees, HMRC will probably think you’re hosting a business function and pull the annual function allowance from you.
If your business has more than one location, an annual event open to all your staff at one location still counts as exempt. Alternatively, you can put on separate parties for different departments – as long as all your employees can attend at least one of them.
The exemption applies to virtual events, too, so don’t worry if you can’t get everyone together.
Hosting more than one event
Unfortunately, the £150 a person is your limit for the entire tax year, so if you hosted a summer party this tax year, you might have to limit your spending for the Christmas party for the exemption to apply.
If the combined cost does go above £150, you could alternatively apply for the exemption on whichever function best utilises it, while the other(s) will be taxable.
You don’t need to record which employee attended what, however. Instead, you can add the cost per head for each function plus the cost per head of subsequent functions.
Gifts
Christmas is the time of giving, and businesses can give gifts to their employees without being hit by hefty tax charges, as long as they abide by the trivial benefits rule.
This rule says that businesses can give gifts to employees of up to £50 without paying tax. However, they cannot be rewarded for performance, part of a contract, cash or a cash voucher.
The good news is that the trivial benefits rule can be used in conjunction with the annual functions allowance.
Taxable rewards and bonuses
If your gift fails the trivial benefit rules, you must report it to HMRC and pay 1A National Insurance. You can do that in a P11D at the end of the tax year.
If you decide to give cash to an employee as a reward, you will have to add the value to the employee’s other earnings, and deduct and pay tax and National Insurance through payroll.
Talk to us about payroll and accounting for trivial benefits.