December is a month of parties, presents and celebrations. Every year, there is confusion amongst businesses as to the tax implications linked to such festivities. Paul Samrah, partner at Kingston Smith LLP in Redhill, clarifies the situation and advises on how to celebrate Christmas in style.

A staff party paid for by an employer technically counts as a benefit in kind on which employees are taxed.  However, an HM Revenue & Customs (HMRC) concession allows employers to host the event without it being treated as a taxable benefit – provided it is open to staff generally and the cost per head is no more than £150.  If it fits this criteria, it won’t need to be disclosed on P11D forms detailing expenses and benefits received by directors and staff.

Employers may organise more than one annual event and all such events may qualify for relief as long as the cost per head does not exceed £150 in aggregate.

According to Paul Samrah, “When planning your event and estimating the tax implications, remember that the price per head is calculated on the total number of attendees, including all staff, their partners and any clients -  not just employees.  Secondly, make sure you include all incidental costs.  This means adding up the venue hire and catering costs as well as items such as entertainment fees, taxi fares, overnight accommodation and VAT (whatever the VAT status of the employer).  If an HMRC enquiry is launched, you will need to provide details of all the costs and attendees.

“Beware of trying to apply the HMRC’s concession to ordinary staff entertaining.  You need to hold an event that is clearly a formally organised function.  Some employers also make the mistake of charging the party to entertainment in the accounts, then forgetting that an event worth over £150 per head must be disclosed on the P11D.  There are potentially harsh penalties for incorrect completion of the forms.”

Kingston Smith LLP is keen to remind businesses that although VAT on entertainment is not reclaimable, VAT on staff parties can be reclaimed, even if it exceeds £150 per head.  This is an extra Christmas bonus not to be overlooked.

When it comes to gifts for staff from their employer, HMRC now accepts that minor gifts may be provided tax-free for employees. There is no statutory de minimis limit, so care is needed. For instance, an employer may provide employees with a seasonal gift, such as a turkey, a 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 companies with large number of employees, the total cost of providing a gift to each employee may be considerable. However, 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.

Paul Samrah concludes, “If the gift extends beyond the trivial, for example, from a bottle or two of wine to a case, or from a turkey to a Christmas hamper, you should take advice as it is likely to be treated as a taxable benefit in kind. As a consequence, unless the cost is shown on the employee’s P11d (and the employee pays tax accordingly) the employer will need to enter into a PAYE settlement agreement with HMRC. The employer will also have a Class 1A (or 1B) National Insurance liability.

“It is important that businesses are aware of the regulations surrounding corporate hospitality and giving.  We don’t want the taxman to crush the festive spirit!”