Jennifer Adams considers the potential for Christmas or other annual functions plus staff gifts to be tax-free.
Spending £150 per head (inclusive of VAT) on an annual staff function is quite common these days. However, by combining this exemption with the ‘trivial benefits’ exemption, it is possible to exceed the £150 per head limit without triggering any tax implications.
The limit may also be surpassed if the event is combined with a promotional event held for potential customers, for costs which are charged on a ‘per head’ basis.
Annual parties and functions
It is important to note that the £150 limit is not a tax-free allowance but an exemption. Therefore, should the amount be exceeded (even by £1), then the whole amount is taxable, not just the excess over £150. The limit can be used to cover two or more events as long as the total combined cost of all qualifying events in the tax year is less than £150 per person.
Calculating the cost of the event is not as simple as multiplying the headcount by £150. The cost is determined by multiplying the number of attendees by £150; that means that should an employee not attend, their £150 allocation cannot be used in the calculation.
Specifically, HMRC requires the events to:
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be annual – typically, this would be an annual Christmas party (although a summer BBQ, or yearly awards night can also come under this heading). This condition will not be satisfied if the event is held as a one-off rather than as a regular occurrence.
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be open to all staff – or all staff at a specific location (i.e., everyone must receive an invite, whether 'everyone' is a team of two or a whole department. No tax relief is available if an event is held solely for directors and their families (unless they are the sole employees of an owner-manager or a family company). Other guests may be invited but the primary purpose must be to entertain staff.
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cost £150 (inclusive of VAT) or less per head – VAT may be reclaimable; however, the reclaim could be restricted if clients or other non-employees attend.
Staff gifts
Some employers make use of the 'trivial benefits exemption' (up to £50 per head, but no cash or cash vouchers) to supplement festive generosity without breaching the £150 limit (e.g., giving Christmas hampers).
Gifts to staff are considered a form of 'business entertainment', enabling the full cost to be tax-deductible for the employer. There is no cap on the amount that can be spent for a tax deduction to be allowed. However, a gift costing more than £50 (including VAT and related costs, e.g., delivery charges, etc.) is taxable as a benefit-in-kind on the receiving employee. Where the recipient is a director or office holder in a close company, tax-free trivial benefits are capped at £300 per tax year.
PAYE settlement agreement
Exceeding the limit means a tax and National Insurance contributions (NICs) bill for both employee and employer, which rather puts a dampener on the Christmas event. To prevent the employee having to meet the tax cost, employers can enter into a PAYE settlement agreement with HMRC to cover the tax or National Insurance contributions (NICs) on the employee’s behalf.
The effective cost can be significant (because the employer would be paying the employees’ tax at grossed-up rates plus NICs), but importantly avoids negative staff impact.
Practical tip
Many employees no longer work in an office environment. To ensure they are not left out of the celebrations, the cost of a 'virtual' event up to £150, including VAT cost will be allowed if the other criteria are met. For example, the cost of sending meal kits to employees and cooking together on Zoom or holding virtual wine or beer tastings (with samples delivered to each person).
