News
Party favours - 2009-12-15
Are you planning to send the taxman a present this Christmas? In these difficult economic times businesses are looking to reduce costs wherever possible. However, many employers will still provide a Christmas party for their staff as they believe the benefits from boosting staff morale outweigh the financial savings. The costs of the party will be carefully budgeted, but you also need to take care to ensure you avoid an unexpected and expensive tax bill.
HM Revenue & Customs provides an exemption covering both income tax and NI contributions for social functions for employees including annual parties. The exemption is £150 per person, but the relief is given in a slightly unusual way which often catches employers out. Providing the cost of an event does not exceed £150 per head, there is no tax or NI contributions to pay. If the cost of the single event exceeds £150 per head, the whole amount is taxable and liable to NIC.
If there are multiple events in the tax year, the costs of each event are combined to maximise the available exemption, and any costs not covered are fully taxable. For example, three events in the year costing per head £90, £65 and £55. The best combination is £90 plus £55 as this is within the exemption. The £65 event is fully taxable and liable to NIC.
The costs to be used in this calculation are inclusive of VAT and all associated travelling and accommodation costs must be added to the overall cost. The cost per head is calculated on the number of people attending the event, and not the number of people invited, and this is likely to result in a higher figure. The HMRC exemption is in respect of annual events, so for example a staff party to celebrate a new contract is not covered.
If employees' spouses or partners are invited to the party, the good news is that the cost per head is calculated including those spouses or partners, and if the cost is less than £150 per head it will fall within the exemption. However, if the cost per head exceeds £150 per head, the taxable benefit for each employee will be the cost for them plus their spouse or partner.
In situations where the costs of the party result in taxable benefits in kind for the employees, the employer's big problem is who is going to pay the tax? There are not many companies that feel they can tell their staff they are going to have to pay tax on the benefit of attending the Christmas party. In the vast majority of cases the employer accepts that they are going to have to pay the income tax and NIC on this taxable benefit, and this is where the taxman gets his Christmas present!
The employer will have to enter into a formal PAYE Settlement Agreement with HMRC, providing full details of the social events giving rise to the taxable benefit and their calculation of the income tax and NIC payable. This is the point at which the Christmas party gets expensive. The party itself is taxable, and so too is the income tax the employer is going to pay on behalf of the employees. The costs of the party are now grossed up to calculate the tax due on the party and the tax due on the tax. The grossing up calculation also takes account of whether the employee is a basic rate or higher rate taxpayer.
For a higher rate taxpayer, a £200 taxable benefit is grossed up to £333, and the tax payable is £133. The employer's NIC liability is then calculated on the grossed up figure of £333, resulting in an amount payable of £43. The total cost to the employer of income tax and NIC is £176, on a taxable benefit of £200. The cost of the Christmas party has suddenly become very expensive.
If you want to avoid putting a smile on the taxman's face this Christmas, carefully control the costs of staff social functions to ensure the exemption threshold is not breached.
Ian Gadie is a business tax manager with Littlejohn. His clients include multinational companies and owner managed businesses. Contact Ian on 020 7516 2256 or igadie@littlejohnllp.com
This article was first published in Waterfront magazine, December 2009.
