The Tax Implications of Entertaining Your Employees

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With the dust now settling on the office Christmas party, employers could be forgiven for breathing a sigh of relief and thinking they can get back to real work. Unfortunately, that might not be the case - because the aftermath of the Christmas party (or any form of entertaining your staff) could leave you with a serious hangover in the shape of an extra tax liability.

Entertaining your employees has tax implications, and there are particular points that every employer needs to keep in mind. There is a tax exemption, but strict conditions apply - and if the conditions are breached then both you as the employer and/or your employees could be liable to tax.

First of all, the guidance from Her Majesty's Revenue and Customs (HMRC) is that the relief only applies to 'annual parties.' So if you decide to celebrate a particularly good quarter by treating your staff to a one-off trip to the races, the relief won't apply.

The relief is set at £150 per head - which is inclusive of VAT. Once you go over £150 then the whole amount becomes taxable as a benefit in kind. Effectively you lose the £150 allowance - so if the cost of the annual party is £151 per head, the full £151 is taxable.

HMRC also stipulates that the cost of the party is the whole cost - so it's not just food and drink that you'll need to take into account. Printing tickets, decoration and - presumably - cleaning up afterwards would all count towards the total cost, as do taxis home and any overnight accommodation. The total cost is then simply divided by the number attending to find the cost per head.

If the limit of £150 is exceeded, then the employee will be liable for tax and the benefit must be appear on his or her P11D. The employee will also be liable for tax in respect of any guests they brought to the party. Alternatively, the employer could pay the tax for the employee, but then a cost for the party of £160 could be as much as £300 when tax and national insurance are taken into account.

If you have two functions - say a Christmas party and an outing during the summer - then the exemption is only available on the function (or functions) which in total amount to £150 or less. If one function costs £100 per head and the second costs £75 per head, then the £100 function would be exempt, but the one costing £75 would be taxable in full.

Making gifts to your employees

Many employers give their staff a gift at Christmas. What are the tax implications of this? The guidance from HMRC is that a seasonal gift isn't taxable, as long as the cost is 'reasonable.' HMRC quotes a turkey, an 'ordinary' bottle of wine or a box of chocolates as a 'reasonable' gift, but don't put a specific monetary value on it. However, there seems to be a general agreement among accountants that HMRC do not look to tax gifts below £50.

For a gift that wasn't seasonal - for example if you were giving your staff a small gift to mark a particular anniversary of the business - it would probably be worth checking with HMRC in advance.