Bosses urged not to end up with a tax hangover after staff Christmas parties

Earlier this year, another survey suggested more than three-quarters of British business leaders deem their company’s Christmas party to be the most important work event of the year.

While there is usually no need to inform the tax authorities of such events, employers will need to tread carefully to avoid overspending and having to report the tax implications to HM Revenue and Customs (HMRC).

To be exempt from Income Tax and National Insurance (NI), parties or similar social functions – including online or virtual parties – must be open to all employees, be annual in nature (such as a Christmas party or summer barbecue) and cost £150 or less per person.

To work out the total cost of such events, businesses need to include not only the cost of the function itself, but any associated costs such as travel, taxis, or hotel accommodation.

All costs must be inclusive of VAT, and £150 is a cost per head - so you divide by the total number of attendees; not necessarily the number of employees.

It should be noted that £150 is an exemption and not an allowance, and that the whole cost would be subject to tax and NI if the figure was exceeded - even by just £1.

It is worth knowing that the £150 limit can actually enable more than one annual event to be exempt if the combined cost of them remains below that threshold.

If the combined cost of two annual events exceeded it, you would typically apply the exemption to the more costly of the two, and the other would be a taxable benefit.

Employers are advised to take specialist advice if they feel that the threshold is in danger of being exceeded.

Ultimately, there are two courses of action.

You could report the cost of the party to HMRC as a staff benefit in kind so your staff pay tax on their share of the cost, but that’s not a particularly good look for a caring employer and not the preferred option.

Instead, if you really can’t avoid going over the limit, you would apply for a PAYE Settlement Agreement which allows employers to make one annual payment to cover all the tax and NI due on any benefits that are minor, irregular or impracticable to apportion between employees.

A PAYE Settlement Agreement is typically the best option to settle the tax and National Insurance on behalf of your employees for taxable staff events and other things such as gifts, rewards and incentives.

It’s worth noting that the £150 limit hasn’t been changed since 2003 and, according to the Bank of England, would be worth £266.57 today.

So HMRC are certainly overdue updating this to show a little more festive spirit for bosses and their employees for the Christmas season.

Tax specialist Richard Whitelock is an Employment Tax Advisory Partner with UK top 10 accountancy and advisor firm Azets in Yorkshire