Sarah Bradford explains how to use tax exemptions to prevent employees from suffering a tax charge on the Christmas party or a Christmas gift.
Many employers will hold a Christmas party for their staff, or give them a Christmas gift. To prevent an unwanted tax charge from arising as well, it is sensible to take account of the available tax exemptions and, where possible, ensure that Christmas events and Christmas gifts meet the associated conditions.
Christmas parties
The tax legislation contains an exemption for annual parties and functions, and while this does not apply exclusively to Christmas parties, it can be utilised to keep the staff Christmas party tax-free.
However, the event must be inclusive, as one of the conditions that must be met for the exemption to apply is that the event is open to all employees or to those at a particular location. This does not mean that all employees must attend, but all must have an invite. HMRC has confirmed that departmental events will qualify. However, events for employees of a particular grade, such as managers only, will fall outside the scope of the exemption.
The exemption only applies to annual events rather than one-offs. Consequently, if an employer holds a Christmas party every year, they will be able to make use of the exemption. However, it will not help if the event is a one-off event, and where this is the case, a tax charge will arise under the benefits-in-kind legislation (unless the cost is less than £50 and the trivial benefits exemption applies).
If the Christmas party is the only annual event held each year, the exemption will apply, provided that the cost per head does not exceed £150. If the employer holds more than one annual event (e.g., a Christmas party and a summer barbecue), the events will fall within the scope of the exemption, provided that the aggregate cost per head does not exceed £150.
The cost per head is found by dividing the total cost of the function and any transport or accommodation provided for those attending by the number of people attending the function. Where guests are invited as well as employees, the total attendees includes the guests.
Where the aggregate cost per head is more than £150, the employer can decide how best to use the exemption. However, the exemption can only be used to shelter whole events – it is not an allowance applying to the first £150. For example, if the employer holds three events each year, costing, respectively, £100 per head, £40 per head and £30 per head, the exemption is best used against the events costing £100 per head and £40 per head (£140 in total). The unused £10 cannot be used to reduce the taxable amount of the event costing £30 per head – the amount charged to tax is £30 (unless the trivial benefits exemption applies).
If the employee is able to bring a guest to the function and the exemption does not apply, the taxable amount is the cost of both the employee’s attendance and that of their guest. The presence of guests needs to be taken into account in deciding how best to use the exemption where there are multiple annual functions and the aggregate cost is more than £150 per head. In the above example, if the employees were able to bring a guest to the £30 per head function only, it is preferable to use the exemption for the £100 per head and the £30 per head functions, leaving the £40 per head function taxable, because if the £30 per head function is left in charge, the taxable amount would be £60 (cost for both the employee and their guest).
Where the cost per head figure exceeds £150, the full amount is taxable, not just the excess over £150. So, if the cost per head is £200, the taxable amount is the full £200, not £50.
Christmas gifts
It is possible to take advantage of the trivial benefits exemption to provide employees with a modest Christmas gift without having to give the taxman something, too.
The exemption applies where the following conditions are met:
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The benefit is not cash or a cash voucher.
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The benefit cost does not exceed £50.
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The benefit is not provided under a salary sacrifice a contractual obligation.
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The benefit is not provided in recognition of particular services performed by the employee as part of their employment or in anticipation of the performance of such services.
The benefit cost is normally the cost of providing the benefit. This will include associated costs, such as delivery or the cost of any gift wrapping. Where the gift is provided to multiple employees and it is impracticable to calculate the benefit cost for each individual employee, the cost of the benefit is instead the average cost. This is the total cost of providing the benefits, divided by the number of employees receiving their benefit. In their Employment Income Manual at EIM21865, HMRC provides the following example of when it would be appropriate to use the average cost to calculate the benefit cost.
“Employer B provides each of its 100 employees with a turkey at Christmas and the total bill comes to £4,500. There are a variety of sizes. Because the employer has made a bulk order, the turkeys have not been priced up individually but would cost in the region of £40 to £60 each. Employees are able to choose which bird they have. Rather than undertake a detailed analysis of the individual benefits, you should accept that the cost per head is £45, reflecting an average amount of £4,500/100. The benefit can be covered by the exemption since the cost for each employee does not exceed the trivial benefit financial limit.”
However, as the following example (also taken from EIM21865) shows, the average cost should not be used where it is possible to identify the cost of the benefit provided to an individual employee.
“Employer C provides each member of its 25 strong work-force with a bottle of wine at Christmas. The total bill comes to £1,000. This reflects 20 bottles of wine that cost £15 per bottle provided to each of its employees and 5 bottles of wine provided to each of its directors that cost £140 per bottle. In this case, it is not impracticable to determine the cost of the individual benefit and the actual cost per item should be applied in determining whether the monetary limit has been exceeded for each employee and director. The benefit of the £15 bottles of wine can be covered by the exemption since the cost does not exceed the trivial benefit financial limit but the benefit of the £140 bottles of wine provided to the directors cannot be covered by the exemption.”
Where the recipient is a director or other office holder of a close company or a member of their family or household, the value of tax-free trivial benefits that they can enjoy in a tax year is capped at £300. For other employees, there is a limit on the number of tax-free trivial benefits, but each must meet the conditions above.
Care must be taken when giving gifts that provide repeated benefits, such as a gift card which may be topped up, access to an app providing goods or services, or a season ticket or similar annual pass. Here, the cost of the benefit is the annual cost, not the cost per use, and where the annual cost is more than £50, the trivial benefits exemption will not apply.
For example, if an employee is given access to an app that allows them to book six beauty treatments a year, each costing £45, the annual cost is £270. As this is more than £50, the trivial benefits exemption does not apply, even though the cost of each individual treatment is less than £50. To keep the treatments within the exemption, the employer should meet the costs directly as they arise.
Practical tip
If a tax charge arises on the benefit of a party or a gift, consider using a PAYE settlement agreement to meet the liability on the employee’s behalf.
