A Tax-Smart Party!

Author: Banin Oozeerally

Party season is coming! Read on to unwrap the secrets to a tax-smart holiday season! From staff parties to bonuses and gifts, discover how to keep your team happy without crossing wires with HMRC. Get the lowdown on tax exemptions, VAT claims, and much more…

Staff Parties
A fun way to celebrate with your team is to enjoy a Christmas party. Parties are tax-free for your employees if the average cost is no more than £150 per head.

To calculate the cost per head, divide the total costs (including VAT) for everyone (employees and non-employees) by the number of people. The costs include food, drinks, venue hire and any related expenses such as accommodation and taxis.

Remember, you can claim VAT on staff entertainment unless only directors, partners or sole traders attend. You can’t claim VAT for any clients at the party.

If the cost per head is over £150, then the whole amount is taxable and not just the excess.

If you have more than one party a year, such as a summer barbecue and a Christmas celebration, add up the total costs and divide by the total number of attendees to get the price per head. If this is over £150, you can choose which function to use for the tax exemption. For example, if the summer party costs £120 per head and the Christmas party £140 each, you can use the exemption for the Christmas party and pay tax on the summer bash. If each function costs £60 per head, then the total costs of £120 are within the tax exemption.

Tip: You can also enjoy virtual parties, now treated as annual functions by HMRC, if they meet the same conditions.

Trivial Benefits
Giving gifts is another way to thank your team. They will not pay tax on small presents that meet the ‘trivial benefits’ conditions:

• The benefit must not cost more than £50 per head, including VAT. If it does, the whole amount is taxable, not just the excess.
• The benefit must not be cash or cash vouchers. It can be non-cash vouchers, such as gift cards or coupons.
• The benefit must not be part of a salary-sacrifice arrangement, contractual obligation or in recognition of services performed, such as a gift card for working late.
• The benefit must be given for a non-work reason out of generosity or goodwill, such as flowers for a birthday or a Christmas turkey.

Beware!
There is no limit to the trivial benefits you can give your employees in a tax year, except for directors of close companies (companies controlled by five or fewer shareholders or any number of directors who are also shareholders) or their family or household members. For them, the annual cap is £300. Any amount above that will be taxable.

Also, be careful not to give trivial benefits too often or regularly, as they may become taxable if seen as being linked to performance (e.g. month-end drinks).

Staff Bonuses
Cash rewards, such as Christmas bonuses or cash vouchers, are earnings and subject to PAYE tax and Class 1 National Insurance. You have to deduct tax and National Insurance from the bonus before you pay your employees.

You must also report the bonus through payroll on your Full Payment Submission (FPS) to HMRC when you pay your employees. You do not need to include it on the P11D form or pay class 1A national insurance.

Taxing non-cash benefits: P11D or PSA?
If you provide taxable benefits-in-kind to your employees, such as staff parties that exceed the £150 limit or non-trivial gifts, you have two options to deal with the tax liability: P11D or PSA.

P11D
P11D is a form you submit to HMRC every year by July 6 following the end of the tax year. On this form, you report all the taxable benefits-in-kind that you have given to your employees during the year. You also pay class 1A National Insurance on these benefits by July 22 (or July 19 if you pay by post).

The advantage of P11D is that you do not pay income tax for your employees. The disadvantage is that your employees pay income tax on the benefits, either through self-assessment or through their PAYE tax code.

PSA (PAYE Settlement Agreement)
A PSA is an agreement with HMRC to settle the income tax and national insurance for your employees for certain benefits-in-kind. You can use PSA for benefits that are irregular, minor, or impractical to apportion among your employees, such as staff parties, gifts or shared taxis.

The advantage of PSA is that your employees do not pay any tax on the benefits. The disadvantage is that you pay income tax and class 1B National Insurance on these benefits, and you gross up the amount to reflect the tax your employees would have paid.

You also register for a PSA by July 5, following the end of the tax year. The employer specifies which benefits and which employees are included. The agreement continues until HMRC or the employer amend or cancel it. Where a PSA is entered into for the first year during or after the first tax year, the employer cannot include any item before the agreement which should have had PAYE applied or was included in the employee’s tax code.

The employer pays the tax and national insurance by October 22 (or October 19 if you pay by post). There is no specific deadline for submission, but it would be good practice to do it a few weeks before the payment deadline.

Amounts reported on a PSA agreement are not taxable on the employee, and no additional reporting is required.

Party with peace of mind!
By keeping these rules in mind, you can plan your parties and pressies without falling foul of HMRC. However, if you have any questions or need assistance with the benefits you provide to your employees, please get in touch with us.