Expenses expert, David Vine, looks at the tax implications of company Christmas Festivities and warns that being a Grinch could backfire. He outlines five rules to be followed.
Sergeant, Major and Bristle, a substantial mid-tier firm of solicitors with good coverage in the south west of England (with offices as far afield as Truro and Bath) decided to scale down its Christmas party this year. Instead of hosting a ball for all members of staff at the Exeter Hilton with taxis provided to take staff back to their local accommodation, it decided to host smaller dinner parties just for partners and their spouses in each of the five county towns where it had a presence.
Bashitt & Weld, a manufacturer supplying computer components, decided to suspend its annual Christmas party. The clever accounts department had realised that they could make significant savings by hosting the party in the 'dead' period in February when the local hotels would be far more susceptible to hard negotiation. Hosting the party in February would still leave enough of a time gap between it and the company's family day in July.
Both of these companies could face paying a significant and unexpected tax bill.
Many employers have cancelled, or are thinking about cancelling, the work Christmas party this year because of the economic crisis. The cash benefits of that decision could be cancelled out by the actions of regional office managers, departmental directors and team leaders across the organisation.
Many bosses customarily take their team out for a celebratory Christmas lunch, or at least a round of drinks after work and charge the cost back to the company via the expenses system. If the Christmas party is cancelled the boss may feel all the more inclined to do so and push the boat out a little more to reward staff for their hard work and improve morale. However, if by doing so, HMRC rules are broken, the fun could result in an unexpected cost to the employer and also to the employee.
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As a general rule of thumb, if a company or organisation spends £10 on an employee that pays income tax at the 40% rate then the gross cost to an employer who settles the cost as part of a PSA is about £17. If the employer pays £25 for the employee's lunch, the true cost for tax purposes is around £40.
If the employee is a basic rate tax payer then the true cost after tax, is closer to £14 than £10 and more like £36 per lunch.
In view of the cost implications of employees' unilateral Christmas festivities, employers might as well go-ahead with their Christmas party plans and benefit from the improved morale a knees-up would bring to the organisation.
In order to keep on the right side of the tax man this Christmas, and keep celebration costs down, companies and organisations should remember the following five rules and make sure that their employees, especially those with sign-off responsibility, are aware of the cost implications of their team's actions.
Rule 1: Employee events should not exceed £150
If an employer provides one annual function for employees no charge to tax arises if the total cost of the event per head does not exceed £150. If an employer organises a number of events for their staff over the year, such as a summer barbecue at the CEO's house in the country, a family day and a Christmas party, then the combined per head cost of each event must not exceed £150.
Rule 2: The £150 is not an allowance
The figure of £150 is not an allowance. If the total cost per head goes over £150 then whichever functions best utilise the £150 is exempt, the others are taxable. Even if there is only one event if the total per head spend for that event exceeds £150, the entire cost of the event is taxable.
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The cost of transport and/or overnight accommodation from the event should be included in the cost if these are provided to enable employees to attend. Divide the total cost of each function by the total number of people (including non-employees) who attend in order to arrive at the cost per head.
Rule 3: It should be a regular event
The amount spent on an employee for entertainment purposes is only tax free if it is an annual event. Regular, planned events such as a Christmas party, if it takes place every year, qualify for tax exemption. Ad hoc department jollies and drinks do not qualify for tax exemption. Neither does a lunch with the boss on expenses. These expenditures are seen by HMRC as a taxable benefit, and should be reported on the employees P11D and taxed accordingly or settled as part of the companies PSA (PAYE Settlement Agreement).
Rule 4: Observe the location and availability limitations
The £150 tax-free employee entertainment exemption is only applicable if the entertainment is available to employees generally or available to employees generally at one location, where the employer has more than one location. If an employer organises its workforce at one site into separate sections or departments, an annual party may be provided separately for the different sections (e.g. separate wards in an NHS hospital trust). As long as a party is available generally to all staff at the site, and the other conditions are satisfied, the exemption may apply.
Director-only dinner parties won't qualify for tax exemption; neither will golf days for managers.
Rule 5: It's a fiscal year
The tax exemption applies to the fiscal NOT calendar year. Companies that have decided to put-off their Christmas party, but host a summer event instead when they have better got the measure of the economic decline, should be careful that they don't exceed the £150 limit when combined with the festivities for the 2009/2010 Christmas party.
Other gifts from the tax man
In certain circumstances you can get some benefits without paying tax on them. Tax-free benefits can include:
Education, education, education:
Employers must train managers with sign-off approval so that they are aware of and understand the tax and, therefore, cost implications of their department's spending. It's no good having policies in place to cut down expense spend or take cost cutting measures if the effect of these will then be undone by your own employees.
David Vine is managing director of GlobalExpense [1], the UK's largest employee expenses service provider (www.globalexpense.com [2])
Links:
[1] http://www.globalexpense.com
[2] http://www.globalexpense.com