Tax planning for the party season

With the festive season upon us, it’s that time of year when HMRC seems to turn into the Grinch, ‘stealing Christmas’ from the many businesses planning parties for their employees and clients. Here’s how to avoid a tax hangover after the party.

Staff entertainment is treated as an employee benefit. This means that the cost is taxable on each employee and subject to employer’s 13.8% NIC. However, a staff party or social function, whether for Christmas or anything else, is exempt from the benefit rule IF certain conditions are met:

  • The function cannot cost more than £150 per person.
  • The function should be an annual party or similar.
  • It should be available to all employees in the business (in more than one location if necessary).

 If your Christmas event falls outside the above conditions then the benefit should be reported on the employees’ P11Ds and, as an employer, you pay employers’ national insurance on the cost. To be clear, if the party costs over £150 per person, it would fail the test; you cannot simply deduct the £150 as an allowance.

No company wants to be labelled a ‘Scrooge’ and will usually pick up the cost of the tax by arranging a one-off PAYE settlement agreement with HMRC after the financial year end. However, in so doing, the employer is providing yet another benefit and must gross up the cost to fund the tax on the tax.

Employers’ national insurance can, of course, also be paid under the PAYE settlement agreement, so at least it’s all dealt with it in one go. Ideally, however, most employers ensure that the exemption conditions are met, and the problem is avoided altogether.

The annual Christmas party usually isn’t the only social function to happen at Christmas. As an employer, if you pay for meals which are not part of an annual all-employee social function, not part of a training event or not classed as travel and subsistence, then the benefit rules will apply.

Now for the good news! If employees need to entertain clients or go to clients’ functions as part of their jobs then there is no taxable benefit on those individuals provided that the function isn’t a direct reward for their services.

Additionally, staff entertaining is deductible when it comes to computing the business’ taxable profits. Sadly, this is not the case when it comes to entertaining clients.

If you decide to give festive gifts to your clients, that cost is also generally disallowable when preparing the business’s tax computation. But even the HMRC Grinch can offer a little Christmas cheers with a ‘small gifts’ exemption for gifts costing less than £50 and bearing the company’s brand. Make sure, however, that the gifts aren’t either food, drink or tobacco products.

Tax and staff parties don’t go naturally and it’s easy for generous employers to get caught out. As ever, the key is to be prepared and here at Lubbock Fine we can help you to navigate employee tax issues so that everyone gets to relax and celebrate! Call Graham Caddock on 02074907766 or email him on grahamcaddock@lubbockfine.co.uk to discuss employee compliance issues.

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