Jono Wilson of Barnett & Turner looks at the tax implications of the Summer or Christmas bash you hold at your workplace. If you’re looking to the summer and planning a party for your employees, it’s worth bearing in mind the potential tax implications. The good news is that, unlike entertaining customers, the costs of entertaining employees are generally allowable against the profits of the business.
But what about the consequences for the employees themselves? Will they have to pay tax on the benefit?
The general rule is that as long as the total costs of all employee annual functions in a tax year are less than £150 per head (VAT inclusive), there will be no tax implications for the employees themselves. In considering this limit, it is necessary to include all the costs of an event including any food, drinks, entertainment, transport and accommodation that you provide.
If the total costs are above the limit of £150, the employee will have to pay tax on the full cost of the benefit. In that scenario, it should be reported on each employee’s P11D or, alternatively, you may choose to enter into a PAYE Settlement Agreement with HMRC to cover the tax.
It is also worth noting that a new exemption in relation to employee entertainment was introduced on 6th April 2016. From this date, a benefit provided by an employer to an employee was made exempt from tax and need not be reported to HMRC on a P11D if all of the following conditions are satisfied:
- The cost of providing the benefit does not exceed £50;
- The benefit is not cash or cash vouchers;
- The employee is not entitled to the benefit as part of any contractual obligation; and
Where the employer is a close company and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family), the exemption is capped at a total of £300 in the tax year.
A company holds two annual functions open to all its employees in the tax year – a summer party and a Christmas party.
The total costs of the summer party, including transport and accommodation, are £10,000 including VAT. The total number of attendees was 100, so the cost per head was therefore £100.
The Christmas party cost £8,000 including VAT, and 100 people attended this. The cost per head is therefore £80.
The total cost per head for both functions is £180, so they cannot both qualify for an exemption. As the cost per head of each party is not more than £150, either event can qualify on its own, however it is more beneficial overall for the costlier summer party to be exempted.
If an employee attends both events, they will be taxed only on the benefit of £80 for the Christmas party. If they only attend the summer party, there will be no taxable benefit because that event is exempt. If they only attend the Christmas party, they will be taxed on the benefit of £80.
Both functions would be taxable if the average cost per head of each of the events exceeded £150. This limit is not an allowance to be set against an amount that exceeds that figure.
It’s worth talking to your accountant if you have any concerns about the tax implications of the summer party season ahead. That way, everyone can enjoy the event without a financial hangover.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at email@example.com