With Christmas just around the corner, many will be anticipating the annual work Christmas shindig. They might have various concerns about this, not least of all the existential fear in the morning where one tries to recollect memories of the night before. However, employees and employers alike might also worry about the tax implications of such an event. Whilst I cannot provide any convenient legislation to the former issue (I may instead suggest that some things are best left forgotten), there is indeed just that for the latter.
Tax liability to employers
Employers will be happy to learn that the cost of entertaining staff is a tax deductible expense for the business. Therefore, when an employer pays for a Christmas party, they can include the costs of the event when computing the trading profits of the business.
Tax liability to employees
As a general rule, employees are charged to income tax on the cost to their employer of providing ‘benefits in kind’. These benefits can include things such as cars, living accommodation (that isn’t job related) and vouchers for goods and services.
Fortunately, there is legislation which allows the exemption of income tax on an annual event if it satisfies certain conditions. The conditions are as follows:
- The party must be available to all staff in general or available to all staff in a given location
- The cost cannot exceed £150 per head. If it exceeds £150, the full amount is chargeable to staff as a taxable benefit. This £150 limit is not done on a per event basis but rather a yearly basis. This means that where there are two annual events, the total cost per head of both events cannot exceed £150.
- The party must be of annual occurrence (it happens once a year or is expected to happen once a year)
The cost per head is simply calculated by averaging the cost of the event across the employees. For example, say a Christmas party cost a total of £1,450 with an attendance of 10 employees. The cost per head is £1,450 over 10 which equates to £145 per head.
Costs that should be included are the total costs of the party such as food and drinks, and any transport or accommodation costs. Essentially, every cost that can be linked with the party should be included.
And for those that are VAT registered?
The input tax on a Christmas party is available to claim back since it is classed as a business expense. The primary conditions are that your company is VAT registered and that the costs are only related to staff. Where the party includes non-staff members, such as customers or suppliers, the input tax claimed must be apportioned based on the ratio of staff : non-staff. For example, let’s say that a firm hosts a Christmas party for its staff which comprises of 20 members in addition to some clients and suppliers, of which there are 10. In this case, the company could claim back 66% of the VAT (20/30 as is the ratio of staff to non-staff).
So, employers and employees should both look to enjoy the upcoming Christmas party. Employers can seek to deduct the cost of the party from their trading profits, and employees won’t be hit with an increased income tax liability. So do have fun, just not over £150 per head of fun.