Party season is upon us and – even more exciting for employers – there is a tax relief that can exempt these events and small gifts from becoming a taxable benefit on their employees.
Annual event exemption
Hosting an annual staff event like a festive holiday party or summer BBQ will be an exempt benefit under the ‘Annual Event’ exemption, providing it meets the following conditions:
- The total cost of the event does not exceed £150 per employee
- It must be an event that occurs annually or intended to be held annually
- It must be open to all employees, or all employees based at a particular location.
The total cost of the event includes all food, drink, taxi fares, incidental accommodation, related gifts and, most importantly, the VAT. (This is the case regardless of whether the employer is VAT registered or not.) If spouses, partners, or guests of employees also attend, their per head cost is ignored for the purposes of the exemption and is not aggregated in with employee costs.
It is possible for the exemption to cover two events if the combined total of these does not exceed £150 per head (e.g., one at £60 per head and the other at £80 per head). However, if an employer hosts two events that add up to more than £150 per head, they must choose a ‘best fit’ to offset the exemption against one of the events. The other event will be taxable unless it is covered by the ‘Trivial Benefit’ exemption.
Trivial benefit exemption
This exemption applies to small ad-hoc benefits. The conditions that must be met for the exemption to apply are as follows:
- The value does not exceed £50 (including VAT)
- It is not in the form of cash or a cash voucher (i.e., a cheque or payable order)
- It is not a reward for work or performance
- It is not expected under the terms of an employment contract.
Any gifts should be ad-hoc and not for recognition of a job well done to meet the ‘reward for work or performance’ condition. Festive examples could include a bottle of wine, a food hamper, or chocolates. During the rest of the year, other examples could include birthday gifts (vouchers or flowers) or baby welcome gifts.
Care must also be taken with ‘trivial benefits’ that are provided regularly. HM Revenue & Customs (HMRC) often take the view that benefits provided regularly to staff may be considered as ‘expected under the terms of an employment contract’ – or, essentially, part of the employee’s remuneration package. In such circumstances, the trivial benefit exemption would not apply. The term regular is not defined by HMRC, but a trip to the pub once every few months could be considered ‘trivial’, yet a trip once a week may not.
Whilst there is a £300 annual limit for Directors of ‘close’ companies, there is no limit on the number of trivial benefits that can be provided to an ordinary employee. If, however, a benefit is seen to be regular or connected then the total value of the benefit provided throughout the year will be considered as one gift, the value of which must remain under £50. For example, if an employer provides a quarterly supermarket voucher worth £15, the value related to that benefit would be £60. This would exceed the £50 limit and therefore would need to be reported to HMRC accordingly.
Both exemptions are all-or-nothing. So if an event costs more than £150 per head, or a gift is over £50, then the whole cost is subject to tax and National Insurance (NI), not just the excess.
Where a benefit fails to meet the conditions for the Annual Event or the Trivial Benefit exemption, the whole value is considered a taxable benefit for the employee. It’s common practice for employers to meet the income tax and NI obligations for gifts and parties by including such benefits on a PAYE Settlement Agreement (PSA). If a PSA is not completed, the amounts must then be included on an employee’s P11D form, where they will be responsible for paying the income tax on the benefit.
Finally, remember that staff entertaining is an allowable expense for business/corporation tax purposes, so the cost of a party can be deducted from taxable profits. A nice festive gift direct from HMRC!
For more information on reporting benefits please contact Chantelle Martinez: chantelle.martinez@ct.me
Author: Chantelle Martinez, CT: Employment Tax
