North-east businesses planning to treat their staff to a festive party this Christmas are being warned not to end up with a tax hangover.
Frazer Nicol, tax partner at UK top 10 accountancy and advisor firm Azets, says it is easy to fall foul of tax legislation regarding exemptions.
And if a slip-up over expenditure means staff end up paying a share of the costs to the tax authorities as a ‘benefit in kind’ (BIK) then bosses will really get a reputation of being Scrooge-like.
HM Revenue and Customs (HMRC) explains that to be exempt from tax and National Insurance (NI), parties or similar social functions – including online or virtual parties – must be open to all employees, be annual (such as a Christmas party or summer barbecue) and cost £150 or less per person.
Frazer said: “It has been a tough year in many respects so it is only natural that those businesses who can afford it will want to reward hard-working staff with an all-expenses-paid, morale-boosting celebration at Christmas.
“However, while there is usually no need to inform the tax authorities of such events, business leaders and directors need to tread carefully to avoid overspending and having to report the tax implications to HMRC.
“Also, the £150 limit hasn’t been changed since 2003 and, according to the Bank of England, would be worth £266.57 today so it might be argued that HMRC needs to show a little more festive spirit.”
Frazer said the value of such events was worked out through adding the cost of the function plus associated travel, such as taxis, or hotel accommodation, all including VAT, then dividing by the total number of attendees – not just the number of employees.
He added it should be noted that the £150 was 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.
He also warned that the £150 limit applied to an aggregation of multiple annual events, not just the Christmas party, with all being subject to tax if the figure was exceeded.
Frazer, who joined Azets in 2021, advises businesses to take specialist tax advice if they felt the threshold was in danger of being exceeded.
He said: “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.
“Instead, if you really can’t avoid going over the limit, why not use a PAYE Settlement Agreement (called a PSA) which allows employers to make one annual payment to cover all the tax and NI due on minor, irregular or impracticable expenses or benefits for employees.”
Frazer added that if spouses or partners were also invited to the party, it would trigger an extra £150 exemption limit.
He pointed out that employers could also take advantage of HMRC ‘trivial benefits’ for which no reporting was required and tax or NI payable if conditions were met, to give a boost to staff, particularly at Christmas.
The criteria is that it cost £50 or less to provide, it isn’t cash or a cash voucher, it isn’t a reward for work or performance and it isn’t in the terms of a contract.