You may have already enjoyed your office party, or be looking forward to it, and it may not have occurred to you that there might be a tax liability associated with it. In most cases, the available exemption probably means that no taxable benefit-in-kind arises, but there are pitfalls for the unwary.
The relevant tax legislation (ITEPA 2003, s 264) says that provided the cost of an annual staff party is no more than £150 per head, the employees attending are not to be taxed on a benefit-in-kind.
The £150 limit
The tax exemption for staff parties applies up to a maximum cost per head (including spouses or partners of employees) of £150, but it is important to note that the £150 includes VAT (even if the employer is VAT registered), and any associated costs such as taxis home or overnight accommodation. The exemption is a limit, not an allowance, so if the cost averages out at £151 per head, the whole cost is a taxable benefit on the employees.
Come all ye faithful!
To be exempt, the party must be open to all employees. If the employer has more than one location, there does not have to be a party at each location, but to be exempt, a party at a particular location must be open to all employees at that location. It is acceptable to have different parties for different departments, for example, but every employee at the location in question must be invited to a party.
More than one party
Some employers have another party, such as a summer event. The £150 limit applies to all parties combined, so if the combined cost of (say) the Christmas and summer parties is over £150 per head, at least one of them will be taxable in full. The employer can choose which (under £150) party gets the exemption.
The exemption is for ‘annual’ parties
Unless a party is held every year, the £150 rule cannot apply. If the employer holds a party to celebrate 50 years of trading, for example, the £150 exemption could not apply to it, even if all the other conditions were met.
No-shows
The £150 test is performed on the basis of those who attend the party, so at least in theory, one employee with a headache on the day who does not go could make the party taxable for everyone else!
‘Party favours’
There is a separate exemption for ‘trivial’ benefits provided to employees, and this includes ‘seasonal’ gifts. HMRC guidance refers to a bottle of wine or a Christmas turkey as examples, but be careful if your Christmas party is already near the £150 borderline. If you have Father Christmas handing out presents at the party, and the cost of those presents takes you over the £150 limit, I can see HMRC arguing that these are part of the cost of the party, and that the exemption for ‘trivial’ gifts does not apply.
Practical Tip:
If for whatever reason your party is going to be taxable, it is possible for the employer to arrange to pay the tax and NIC by means of a ‘PAYE Settlement Agreement’ (PSA). Office parties are specifically mentioned as an example of benefits suitable for a PSA. A PSA involves calculating the tax and NIC by ‘grossing up’ the cost of the benefit, and the employer paying the amount due to HMRC by 19 October (22 October, if paid electronically) after the end of the tax year. The use of a PSA must be agreed in advance, before 6 July after the end of the tax year.
