Employees face paying tax for christmas parties

What are the tax rules for employee entertainment?

That time of year has arrived again, where companies start to think about employee Christmas parties, and after many staff parties were cancelled or postponed last year, there may be the temptation to compensate this year?

Or perhaps you held a summer event and are now looking to hold another event for Christmas? With the planning underway, have you considered the tax implications for your employees?

When is your event exempt from tax and national insurance?

In the UK all employers have certain reporting obligations when it comes to tax and national insurance, however there are circumstances where an employee event is exempt from reporting, and that is when ALL the following criteria are met:

• The event must cost less than £150 per head
• The event must be an annual occurrence, and not just a one off
• The event must be open to all employees

If all the above criteria are met, then the cost will be exempt for reporting for tax and national insurance.

If you had a delayed annual event last year due to Covid restrictions or regularly hold more than one employee event each year (for example, a Christmas party and a summer barbeque), then for both events to be exempt, the sum of both must be no more than £150 per head. Any event, which does not meet the criteria will be taxable.

What if my event is not exempt?

Perhaps your event (or events) costs more than £150 per head? Or maybe on top of your employee party, you hold a second party which is only for Directors (i.e. not available to all staff)?

Under these circumstances, your event would not be exempt from reporting and tax obligations. In the instance of more than one party, if the combined total is over £150, only one event could be exempt, and full tax must be paid on the second.

This would need to be done on each employee’s P11D form, and Class 1A insurance contributions would need to be paid.

Can I reclaim the VAT on my employee party?

HMRC state if an event is held for employees (to reward them for hard work), then this is classed as wholly for business purposes, and therefore the VAT paid can be reclaimed.

The two exceptions to this rule are:
• For parties solely held for directors
• Employees acting as hosts for non-employees

So, to ensure that you can get the most out of your employee party without tax obligations, make sure the cost is kept below £150, and if you are reimbursing expenses for travel etc, consider the benefits of automating your processes to save valuable time at this busy period!