Sarah Smith MCIPPdip, CIPP policy and research officer, shares top payroll tips for employers offering festive gifts and events for their workforces

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We all know Christmas can be a very expensive time for everyone, but what are the implications for employers that provide festive gifts or celebrations? It’s essential that employers and payroll professionals understand the true cost of gifts and events and what needs reporting to HM Revenue and Customs (HMRC) to avoid any unnecessary fines or penalties.

Almost everything that an employer provides to employees is classed as a benefit these days, attracting tax and National Insurance (NI) liability. However, there are some exemptions that can help keep tax costs down.

 

Gifts

Section 323a of Income Tax (Earnings and Pensions) Act (ITEPA) 2003 (see https://ow.ly/LyA050TUVXH) specifies the exemption of a trivial benefit, allowing an employer to provide a gift to employee that is exempt from tax and NI. This exemption is not limited to Christmas gifts since trivial benefits are provided for many reasons, including a gift for the birth of a baby, when an employee gets married or a milestone birthday. Whatever the reason, all the following statements must apply:

• the gift is no way linked to any contractual obligation
• the gift is not cash or a cash voucher
• the gift cost the employer less than £50 to provide
• the gift is not in recognition of service or in any way related to work performance.

Trivial benefits don’t need to be reported to HMRC and there’s no set limit on the number of trivial benefits that can be provided in a year. However, the maximum amount that directors of ‘close’ companies can receive in any tax year is £300.

 

Party time

A tax exemption for Christmas parties falls under annual events, specified in section 264 of ITEPA 2003 (see https://ow.ly/A0P050TUW4o). Any type of social event or party provided by an employer can qualify as non-taxable benefit if:

• the event is accessible to all staff
• the total cost of an event, inclusive of value added tax (VAT), is less than £150 per head.

 

Calculate the cost per head

The cost of any event must include:

• the full cost of providing the event, including venue, entertainment, decorations food, drinks etc
• all transport and accommodation provided
• any VAT payable.

The total value of the event must then be divided by the number of guests that actually attended the event, not solely the number of employees in attendance. The number is to include any partners or children attending.

It’s also worth clarifying that the number of employees in the business or the number of guests that accepted the invitation cannot be used as part of the calculation.

 

Annual functions

The £150 per head tax exemption, outlined in ITEPA 2003 section 264, relates to all staff events provided in a single tax year – whatever the reason or whenever it takes place.

Remember, it’s an exemption, not an allowance. Therefore, where a single event exceeds a cost of £150 per head, the whole event cost will become taxable, not just anything over the limit.

In the case of more than one function being provided in a tax year, for example a Christmas party and a summer BBQ, the total cost of both events combined would need to be less than £150 per head for the exemption to apply.

However, if the Christmas party was £135 per head and the summer BBQ worked out at £75 per head, a savvy employer would be within its right to use the exemption for the Christmas party and report the BBQ.

 

Reporting

With all that said, what if an employer chooses to provide a party that costs more than £150 per head or a gift that doesn’t qualify as a trivial benefit?

The employer could either report the benefit to HMRC, just like any other benefits provided to the employee, then the employee would be liable for the tax and the employer would be charged the class 1A NI.

As it’s unlikely there are many organisations that would expect the employee to pay the tax liability on their Christmas gift, the employer can request a pay as you earn (PAYE) settlement agreement (PSA). A PSA allows employers to cover the tax and NI due on minor, irregular or impracticable expenses or benefits provided to employees.

Further information on PSAs can be found at https://ow.ly/tpie50TUWhU.

An article on PSAs by Samantha O’Sullivan, CIPP policy and advisory lead, is available at https://ow.ly/GWaZ50TUWjQ.

Hopefully, this will help take the stress out of planning your Christmas celebrations. Wishing you all a very merry Christmas and a happy new year. 

• Policy article
• Professional magazine