December is a blur to most and the office Christmas party seems to arrive a little earlier every year, so we’d like to take the opportunity to remind contractors that they can have a tax-free good time courtesy of HMRC. It seems that even the taxman is capable of a little seasonal goodwill...
Although it isn’t well-advertised by HMRC, a staff party or annual function qualifies as a tax-free benefit. Provided that the cost of the event doesn’t exceed £150 per head (including VAT) and the event is open to all staff generally, the party is tax-free.
The ‘open to all staff’ caveat is an important point; the guest list can’t be comprised of just company directors, unless all staff are directors and the firm qualifies as a Personal Service Company (PSC).
HMRC’s ‘per head’ figure is worked out by taking the total cost of the event – that’s accommodation, transport, food and drink, ticket prices (if applicable) and any other costs involved – and dividing it by the total number of guests in attendance, including non-employees.
So to simplify, if the total cost of the event is £2,250 and you have 15 attendees (including employees and their spouses), you’ll make the £150 per head allowance on the nose.
It’s important to remember that the £150 is not an annual allowance. If the cost per head exceeds the £150 limit, the entire total of the cost per head then becomes taxable as opposed to just the excess. It seems that the taxman’s seasonal goodwill has a very defined limit.
To simplify again, if the cost per head comes to £155, then the entire £155 is taxable as a benefit as opposed to just the excess £5. The whole £155 would therefore need to be reported on form P11D as part of your end of year expenses.
It is possible to splash out on more than one party or function and spread the £150 between the annual events - for example, £75 per head on a Christmas dinner and £75 per head on a summer ball. All of the above provisions still count for both events.
Let’s give some context:
In December 2018, Pete Ltd organises a Christmas party for all employees at a cost per head of £95. Prior to this, in June 2018, the employer also organised a summer outing at a cost per head of £50 for all attendees. The total cost of both events is £145 and is therefore within the £150 tax-free limit. However, a third event is arranged in the same tax year at a cost of £30 per head. This third event tips the aggregate cost over £150 and is taxed in full.
Where there are multiple annual functions and the cost per head totals greater than £150 for that tax year, only the functions that are in excess of the £150 will be taxed.
If the limit is only exceeded by a nominal amount, say £5 per head like our example above, then employees could pay a contribution towards the cost of the function to keep the whole company benefit allowance within the tax-free limit. This could then be repaid to the employee(s) by grossing up through the payroll.
Where the aggregate cost of two annual social functions exceeds the £150 limit, it is possible to use the trivial benefits exemption.
As of April 2016, a statutory limited tax exemption for trivial benefits costing less than £50 was introduced. This £50 limit applies per individual employee benefit, though directors of PSCs can only claim up to £300 per tax year.
What exactly does HMRC class as a ‘trivial benefit’? It’s a trivial benefit – and therefore tax-free - provided that:
- It costs the employer £50 or less to provide
- It isn’t cash or a cash voucher
- It isn’t in the terms of the employee’s contract (including under salary sacrifice arrangements)
- It isn’t given for non-work reasons, like for a birthday or social event.
Yet again, if the cost of the employee benefit exceeds the £50 allowance, the full amount is taxable as opposed to just the excess.
Let’s have some more context:
Ryan attends two annual functions held by his employer, one at Christmas and the other in the summer. The first function costs the employer £130 per head and the second costs £45 per head. The first function is tax-free as the cost is less than the £150 per head allowance. The second function is not covered by the same exemption because the £150 allowance is exceeded by the aggregate cost of the two events. However, the second function can be covered by the trivial benefits exemption because the cost did not exceed £50 including VAT.
So, have a drink on HMRC this Christmas!