When it comes to Christmas parties and gifts, employers that play Scrooge and manage to keep a lid on the costs could enjoy considerable tax savings, according to Smith & Williamson.
There is a specific tax exemption for annual parties or similar functions for employees. The exemption only applies when available to all staff, or all staff at one location, and the cost does not exceed £150 per head each year, inclusive of VAT.
Paul Tucker, a partner and employment tax specialist in Smith & Williamson’s Bristol office, said: “When working out the cost per head, the whole cost of the event is counted, from the start to the end, so taxis to and from the function and any overnight accommodation have to be included in the calculation.
“The thing to remember is that it is an exemption, not an allowance. So, if the cost goes over £150 per head then unfortunately all the costs, not just the excess, are taxable as a benefit in kind. If the limit is exceeded, the benefit must either be reported on each employee’s P11D with the employee paying the tax and the employer the employer’s National Insurance Contributions or alternatively, the ‘grossed up’ tax can be paid by the employer through a PAYE settlement agreement.
“Grossing up could mean that an event that cost £160 per head could lead to an additional tax and national insurance bill of up to a further £140 per person for a higher rate taxpayer. So keeping the event cost down to £150 could almost halve the total cost to the employer.”
Paul added: “If you put on more than one event for all employees and the cost per head of each is less than £150, but in total exceeds £150, then you can only exempt the one with the highest cost and treat the other one as a benefit.”
For those employers planning to present their staff with Christmas presents, it’s worth brushing up on the new tax rules as well as potential pitfalls. The good news is that from 6 April this year, non-cash gifts and staff entertaining costing up to £50 per occasion, including VAT, will not be taxable or liable to National Insurance provided that they are not part of a salary sacrifice arrangement, and they are not a reward or in recognition of work undertaken by the employee.
Mr. Tucker said: “An employer is now able to give non-cash vouchers of up to £50, such as store vouchers, without attracting tax or national insurance. An employer used to be able to give small items such as hampers or bottles of wine tax free, but could accidently face a large tax bill when trying to provide something as simple as stores vouchers.
“There is no limit to the number of gifts an employee may receive unless the company is a ‘close company’ where an annual limit of £300 may apply for some employees. The recent changes could end up saving some employers thousands of pounds.”
He added: “Christmas may be a time to be generous, but when it comes to staff parties, entertaining and giving presents, an element of playing Scrooge may pay.”