Christmas parties are on the horizon – will you give HMRC a present?

Date posted: 10th Oct 2022

The summer is gone, autumn has begun and tubs of Quality Street are on the shelves in Tesco, which means that Christmas will be here before we can blink.

Christmas is a great time for entertaining employees and many parties will have already been organised. However, many employers need to be aware of the tax rules in relation to entertaining staff to avoid tax charges.

There currently exists an exemption (not an allowance) for annual entertaining of staff – this exemption is £150 (including VAT). Annual entertaining costs below this level are exempt from tax and thus do not need to be reported to HMRC. It is important that employers realise that once the cost of £150 (including VAT) is exceeded, that the full cost is subject to tax, not just the excess over £150.

It is important that all employees are invited to the function/event but not all employees have to attend. In addition, the word annual is highlighted above as businesses may host more than one staff party per year. As long as the £150 exemption is not breached, in total, then there will be relief for the entire payment. However, if the £150 exemption is breached, then a decision will be required in relation to what event cost to report.

For example, lets say the summer party costs £90 per head (including VAT) and the Christmas party costs £65 per head (including VAT). As the total exceeds the £150 “limit”, then only one of the parties can be exempted from tax. It would make sense to elect for the summer party to be excluded given that this costs the most but this would mean that the employee would be subject to tax on the cost of the Christmas party.

However, the employer can still pick up the tax bill, to avoid being considered a Scrooge by employees. The business could apply to HMRC to pay the tax on behalf of the employee via a PAYE settlement agreement.

From a business tax / corporate tax perspective, the level of the entertaining does not matter – staff entertaining is regarded as a deductible expense and VAT recovery is possible. However, if clients, customers or suppliers attend the event, then there will be adjustments required in relation to the VAT and corporate/business tax deduction.

If you have any queries regarding staff entertaining or PAYE settlement agreements, please give us a call.

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