Q. We are currently planning our annual staff Christmas party and gifts. With H M Revenue & Customs (HMRC) current level of activity into PAYE & VAT compliance we do not want to risk making errors in what is taxable or not and wondered if you could provide an overview of the main areas in order to avoid confusion?
A. You are quite right to be concerned to ensure you do not fall foul of HMRC and current legislation and as Christmas approaches it is a good time to clarify the rules regarding the tax aspects of staff parties, gifts and entertaining.
Annual staff parties
There is a £150 (average cost per person) per tax year limit under which no benefit in
kind arises on the employee in respect of attendance at a staff party/function. There is no
requirement for the function to take place at or around Christmas, although many do. The employer has to identify the average cost per function per person and if there is more than one function the employer has to establish to which (if any) function(s) the exemption applies.
To get an average cost per person requires the inclusion of VAT, accommodation and transport after which the total is divided by the total number of people attending, including
non employees. Note that each function must be open to all employees generally, although it can be restricted to employees from a department, division or site. Any staff being excluded from a particular function would result in that function being taxable in full on employees attending, with no exemption.
If there is one function and the cost per person exceeds £150, it is a taxable benefit as
the limit has been exceeded. The full amount of the cost is taxable and there is no ability
to deduct £150 from the benefit in kind arising.
If there is more than one function which in total exceeds the cost of £150 then the exemption is only available on the function or functions which in total amount to £150 or less. Say there are two functions at £100 and £75. Assuming that the employer determines that the £100 function is exempt but the £75 function is taxable in full then if an employee only attended the £75 function, they would be taxed on the £75 benefit in full. If the employee attended both functions they would still only be taxed on the £75. Obviously, if the employee does not attend either function or just the one with a cost of £100, no taxable benefit would arise.
Note that the £150 annual function exemption (and the various points below) has no impact on the tax position of the employer. The exemption is a relief from an income tax benefit in kind charge for employees. The expense is allowable in the employer’s tax computation no matter what the impact on the employee. In addition the employer can recover VAT incurred in respect of attendees who are employees (but not in respect of other attendees e.g. partners of employees, customers, suppliers etc).
Class 1A National Insurance contributions would be payable by the employer on any benefit in kind charge entered on employees. forms P11Ds.
Most gifts from an employer to an employee are taxable in full. If the gift can be classed as immaterial, say one bottle of wine a year, it will be non-taxable on the basis of triviality but regular gifts or one high value gift would have to be declared on form P11D (except in the case of non director employees earning at the rate of less than £8,500 per annum) giving rise to a tax liability on the employee and a Class 1A National Insurance liability on the employer.
The entertaining of customers/potential customers/other business contacts by an employer is not a tax deductible expense for an employer. The employer cannot reclaim VAT on the costs relating to entertaining events unless the event is predominantly for staff in which case VAT can be recovered on the costs of staff attendees (but not in respect of non staff attendees e.g. partners). Entertaining is defined as including any hospitality whatsoever and therefore would include such items as concert tickets or invitations to attend football matches in an executive box. The cost incurred on entertaining is not a taxable benefit on the employee so long as the cost is incurred wholly, exclusively and necessarily in the performance of their duties.
This test is generally satisfied if the employee can be said to have acted as a host to the employer’s guests.
Following on from the above it should be noted that if VAT is recovered on an item of entertaining on the basis that it relates to staff entertainment then the item is likely to represent a taxable benefit in the employee’s hands (unless the annual function £150 exemption applies). Where the staff act as hosts to the employer’s guests this should not give rise to a taxable benefit but VAT incurred will be irrecoverable.
If you need any further help or information you can also call our tax consultants on 01455 852550 who will be able to advise you.