Christmas calculations

Your guide to trivial benefits

04/11/2016

The Christmas party

It’s (almost) the most wonderful time of the year, and many employers are turning their attention to the annual office Christmas party. With this in mind, we’ve created a handy trivial benefits guide about expenses and benefits associated with social functions and parties associated with work.

An employer may spend up to £150 per head (inclusive of VAT) per year in providing annual functions and events to entertain its staff.

Provided that this £150 limit is not exceeded, there can be any number of parties. For example, an employer could host three parties on three separate occasions at a cost of £50 each during the year.

Calculating the cost of the benefit

Add together the cost of the party or function (room hire, food, entertainment, prizes, etc), the cost of transporting staff and their guests, and the cost of providing accommodation.

To calculate the cost per head, divide the total by the number of persons – staff and any other guests – attending the function. If you have a large function, it may be impossible to count up exact numbers of those who attend (particularly if people come and go at different times). If it is impossible to work out actual attendees, then you will have to estimate numbers according to what was budgeted or booked. Note that bookings are normally made on a ‘per head’ basis.

The figure of £150 is not an allowance. So if the cost per head works out at £152 then £152 is taxable as a benefit in kind, and this figure will be on your employees’ P11d, not the £2.

What if you have more than one party?

 If there are two parties where the combined cost of each exceeds £150 then the £150 limit is offset against the most expensive one, leaving the other one as a fully taxable benefit.

For example:

  • Summer party – cost per head £75
  • Christmas ball – cost per head £110

The Christmas ball would be covered by the exemption, and the employees would be taxed on the £75 from the summer party as a benefit in kind.

Qualifying conditions

  1. The party has to be for all the staff; or if you have divisions or sections you may hold a party for that division or section, separate from the others;
  2. There is no tax relief if an event is solely for directors and their families, unless you are the owner/manager or a family company and happen to be the only employee(s); and
  3. Other guests may be invited too, but the primary purpose of the event must be that of entertainment for all the staff.

Tax treatment for employer

The cost of the staff Christmas party (or any staff annual function) is tax deductible in the employer’s accounts. Section 46 ITTOIA 2005 offers a ‘let-out’ clause, which means that entertaining staff is not treated for tax in the same way as customer entertaining.

There is no monetary limit on the amount that an employer can spend on an annual function. A party costing more than £150 per head will be an allowable deduction in the employer’s accounts, as the employees would pay tax on a benefit at this level so it’s just another form of earnings. 
The full cost will be disallowed in tax if it is found that the entertainment of staff is incidental to that of entertaining customers.

Parties covered by the £150 exemption do not have to be reported on form P11Ds. If you do exceed the limit, and have created a taxable benefit in kind, you might consider settling it using a PAYE settlement agreement (you then pay your employees’ tax and NICs).

VAT and annual functions

  1. Input VAT is fully reclaimable on the cost of the function (as it is ‘staff welfare’ and not regarded by HMRC as entertaining). However, if you are an owner-manager and having a ‘one-man party’, or if the function is mainly for directors (and excludes other staff) then the HMRC will block claims for input tax.
  2. If you are entertaining UK clients as well as staff, you have to disallow a proportion of input VAT (based on the numbers of clients versus staff).
  3. If the event is to entertain UK customers and staff members are there to look after the customers, the whole event is regarded as ‘entertaining’ and you are blocked from any reclaim of input tax.

Want to know more? We can help.

Call us on 0330 123 5577 or drop us a line at hello@flowonlineaccounting.co.uk for further information.