With the season for workplace parties fast approaching we thought it would be a good idea to remind you of the tax implications of these types of events. 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 tax consequences for the employees themselves? Will they have to pay tax on the benefit?
Generally, so 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, comprising any food, drinks, entertainment, transport and accommodation that you provide.
If the total costs are above the limit of £150 the full cost of the benefit will be taxable on the employee. In this case, it should be reported on each employee’s P11D or, alternatively, the business 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 entertaining was introduced on 6 April 2016. From this date, a benefit provided by an employer to an employee will be 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.
Example
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 persons attending was 100 and 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 more expensive summer party to be exempted.
For employees who attend:
- both events, they will be taxed only on the benefit of £80 for the Christmas party
- only the summer party, there will be no taxable benefit because that event is exempt
- only the Christmas party, they will be taxed on the benefit of £80.
If the average cost per head of each of the events exceeded £150, both functions would be taxable. The £150 is not an allowance to be set against an amount that exceeds that figure.
If you have any interest in discussing this subject further, please get in touch with your usual Ryecroft Glenton contact, or Charlotte Burton on 0191 281 1292.