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Beyond the balance sheet

Staff entertaining & trivial benefits - what you need to know for Christmas parties

Stuart Crook 20/11/2020 7 minute read

Stuart Crook FCA, explains how gifts and Christmas party expenditure can be exempt from tax and National Insurance.

The year 2020 has been one like no other in living memory!

Personal and professional lives have been turned upside down by national and local lockdowns, social distancing, working from home, and wearing masks.

Amidst all the upheaval, many employers will likely want to reward their employees for their loyalty and persistency. Christmas and some festive cheer will likely be seen as a great opportunity to do this, albeit it remotely. 

Many ideas will spring to mind, some of which may include:

  • Wine and cheese tasting
  • Secret Santa
  • Employee awards ceremonies
  • Escape room challenges
  • Christmas gifts

Whatever your plans, expenditure related to your staff can become staff entertaining or ‘staff gifts’ and can result in tax implications. This means it's important to establish which category any such spend will fall under. In this blog we explain exactly how you can legally avoid such liabilities.

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HMRC trivial benefits and gifts

When you provide any form of cash, gifts and benefits to staff that aren't included in their wages or salary, this is classified by HMRC in a number of different ways. There are specific areas of guidance regarding benefits to employees, so you need to make sure you don't go over particular limits or there will be a tax liability.

If you do break the limits then you may end up having to include such expenditure on a form P11d creating a tax liability for the employee and a National Insurance (NI) liability for the business. This is an expensive way for the business to remunerate your employees. It's therefore important to plan ahead and take advantage of the HMRC rules and reliefs that are available.

The things you need to consider are broadly categorised as follows:

  • Staff parties
  • Trivial benefits
  • Specific Christmas gifts

The easiest way to deal with this issue is to use something called the trivial benefits rules. Doing this ensures you don’t have to pay tax or a benefit for your employee. There are no specific examples of trivial benefits. Instead, HMRC considers a gift "trivial' if it satisfies all of the below conditions:

  • It cost you £50 or less to provide
  • It isn’t cash or a cash voucher
  • It isn’t a reward for their work or performance
  • It isn’t in the terms of their contract

In cases where all the above criteria are fulfilled, there is no need to inform HMRC or report these benefits in your annual P11D or P11D(b) forms. However, it's important to keep records that support this being the case.

If you provide employees with a seasonal present, such as a turkey, an 'ordinary' bottle of wine or a box of chocolates, as long as the cost is no more than £50, HMRC won't try to tax it.

As a general rule, HMRC considers something 'trivial' if it's £50 per head or less so long as it's not easily identifiable from a large cost. This is for items that are not cash or cash equivalents. As an example, store vouchers are allowable so long as they cannot be converted into cash.

What to do if you exceed the trivial limits

If you give gifts that can’t be counted as trivial benefits, you must:

  • Consider whether it should be reported as part of the employees pay, under normal payroll rules
  • Consider whether it should be reported on the form P11D and pay Class 1A National Insurance on the value of the benefit or;
  • Consider whether you should pay the tax, Employees NI and Employers NI on behalf of the employees under a PAYE Settlement Agreement
In general, the question will be whether the value of the gift is over £50 and/or is re-saleable, but broadly:
  • Cash bonuses - use the amount you pay to the employee
  • Goods with no resale value - use the amount the goods cost you
  • Goods with cash re-sale value - use whichever is the higher of the re-sale value or the amount the goods cost you

Trivial benefits and directors

Ordinary employees can receive trivial benefits of £50 or less once a month provided the other conditions are complied with.

For directors of closed companies, the limit is six monthly benefits in a tax year.

Broadly speaking a company is closed if it is:

  • Under the control of five or fewer participators and their associates, or
  • Under the control of directors who are participators and their associates

Staff entertaining allowable expense through the annual function exemption

Many employers provide a number of functions to their staff. Typically, these take the form of some sort of annual event, usually taking place in the summer and/or at Christmas.

The amounts incurred by the employer in respect of the employee are taxable unless there is an exemption from tax, known as the annual function exemption.

An exemption from tax is provided to employees where their employer provides them with a social function and a number of conditions are met, namely:

  • The function should be an annual party
  • The event should be available to all employees in the business, or all employees at one location where the employer has multiple locations

Although the legislation includes the term ‘annual’, HMRC has not to date expected the employer to hold the same event every year. However, the event should be of an annual nature such as a Christmas party or summer barbeque. Events which, by their nature, are one-off events will not be covered by this exemption. For example, if an employer is having a celebration because it has been in business for 50 years, this would not be classified as annual for the purposes of these provisions.

The qualifying cost is £150 per person attending the event. The total cost includes all of the costs associated with the function, such as transport, food, drinks, accommodation, etc. and the VAT. The VAT element of the cost is often missed in the calculation and can clearly lead to difficulty as the exemption is an all or nothing exemption, not a tax free amount. The total amount is then divided by the total number of people attending in order to calculate the cost per person.

There is no limit on the number of guests each employee can bring for this exemption to apply. However, most employers limit the number of guests for cost purposes. When calculating the cost per person, it is the total cost divided by the total number of attendees, not just the total number of members of staff.

While there is no limit to the number of guests that an employee can bring under the exemption, if the amount falls outside the exemption then the employee’s taxable benefit is the cost per person for both them and all of their guests. The total amount of this cost is then the taxable benefit to the employee, not just the amount above the £150 exemption.

If the employer holds more than one event, such as a Christmas party and a summer barbeque, then there is no taxable benefit if the aggregate of the events is less than the £150 annual exemption.

If the two events exceed £150 per person, then a taxable benefit arises in respect of one of the two events. The £150 amount is not an allowance to be netted off the total costs. If costs are not covered in entirety, then the full amount is taxable whereby:

  • The £150 exemption can be used against the event which is most beneficial from a tax perspective
  • A taxable benefit arises on the whole value of the second or subsequent events

Applying the exemption to remote events

Given COVID-19 restrictions, physical Christmas parties are unlikely to be feasible for most, if not all, businesses. The good news is an online party will likely qualify as an "event location". However, to be eligible for the exemption you will likely need to record an attendance list to prove your staff took part.

The threshold being per head means the limit can be applied across several different events. The key is each event must fulfil the qualification criteria.

What happens if your event(s) exceeds the £150 limit per person?

If the £150 limit is exceeded there are basically two options. The first is to declare the benefit on the employee’s Form P11d. This will give rise to a tax liability for the employee and a National Insurance liability on the employer.

If the employer does not wish to create a tax liability for the employee they can enter into a PAYE Settlement Agreement with HMRC whereby the employer agrees to settle the tax and NI liability on the grossed up value of the benfit. Any such agreement must be applied for before the 6th July following the end of the relevant tax year and preferably well before the deadline.

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The content of this post was created on 20/11/2020.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.

 

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