Partner Article

Christmas parties and entertaining can be taxing!

Declan McCusker, Audit Compliance Partner at Perrys Chartered Accountants, discusses the tax implications for businesses entertaining during the festive season

As we are now well into the festive season, many employers and staff alike are buying their mistletoe, dusting down their Christmas frocks and preparing for partying with colleagues. Employees may have too much drink – and build up enough ‘Dutch Courage’ to discuss salaries, perks and holidays with their bosses (and possibly regret it in the morning)!

However, have employers considered the various tax implications before they pop the champagne corks? And for employees, have they considered the potential income tax implications if they order too much bubbly?

How much can be spent by employers? If the cost per employee does not exceed £150 per person, then there will be no income tax implications for the employees.

However, before the celebrations begin in relation to this ‘generous’ concession by HMRC, there are additional rules which need to be considered in order for the £150 exemption to apply:

• The total cost including VAT and all incidental costs (e.g. taxis, hotels, etc.) must be below £150 per person
• If spouses or partners attend, they are not included within the £150 per employee (which effectively doubles the exempt amount to £300 per couple)
• The event must be an annual event and it must be open to all staff – or all those staff at a particular location
• If the £150 per head is exceeded, then the entire cost is a taxable benefit. The £150 is not an allowance, it is a limit – if you exceed the limit, the whole amount is taxable

Furthermore, if there is more than one event per year e.g. a Christmas party and also a summer party, provided the combined costs per head do not exceed the £150 limit, no charge would arise. If the cost per head exceeds £150, then you can choose the event to best utilise the £150 per head annual limit.

Further considerations for employers

The cost of employee entertaining does attract tax relief for the employer as a tax deductible expense (client entertaining is not tax deductible).

If clients or business guests are invited to a Christmas party, then an appropriate apportionment will need to be made between employees and others for these purposes.

If the business is VAT registered, the VAT on the staff entertaining element can be reclaimed. However, any VAT on non-staff entertaining cannot be reclaimed.

HMRC Christmas Parties

According to The Telegraph, HMRC resists holding Christmas parties for its own staff. Bah humbug!

Suggestion for employers

Many employers and employees alike will be horrified that tax could arise for employees attending their Christmas party. Will employees and employers carry their calculators to keep track on the £150 limit per employee?

Under these circumstances, the employer can apply to HM Revenue & Customs for a PSA (PAYE Settlement Agreement). For a PSA, an application is made to HM Revenue & Customs, together with additional information in relation to the event, the employees, etc. and a tax liability is computed and agreed which is paid by the employer. Once the PSA amount is agreed and paid by the employer, no income tax or national insurance arises to the individual employees.

Declan McCusker is the Audit Compliance Partner at Perrys Chartered Accountants in Mayfair and can be contacted on 020 7408 4442.

This was posted in Bdaily's Members' News section by Harriette Conroy .