If you are involved in planning the staff Christmas party for your firm don’t forget to consider the Income Tax and VAT consequences. Here’s a short reminder of the points you should add to your check list.
The cost of an annual staff party or similar function is allowed as a deduction for tax purposes. However, the cost is only deductible if it relates to employees and their guests, which would include directors in the case of a company, but not sole traders and business partners in the case of unincorporated organisations.
Also, as long as the criteria below are followed there will be no taxable benefit charged to employees:
- The event must be open to all employees at a particular location.
- An annual Christmas party or other annual event offered to staff generally is not taxable on those attending provided that the overall average cost per head of the functions does not exceed £150 p.a. (inc VAT). The guests of staff attending are included in the head count when computing the cost per head attending.
- All costs must be taken into account, including the costs of transport paid to and from the event, accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring.
- VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.
If these limits are breached employers can pick up the tax cost by using a PAYE settlement agreement.
A final note on ‘Trivial’ gifts for employees.
Employers may find the following Revenue concession useful – we have copied the note directly from the HMRC handbook:
"An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts are considered to be trivial and as such are not taxable. For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned."
One final cautionary note regarding VAT and staff gifts, VAT is chargeable by the employer when an employee receives gifts totalling more than £50 in a year. Turkeys, however, are still zero rated for VAT purposes!