Nature of the exemption
The availability of the tax exemption is contingent on the associated conditions being met. These are as follows:
- the event is an annual event or similar annual function;
- the event is provided for an employer’s employees generally, or for those at a particular location; and
- the cost of the function, or where more than one such function is held in the tax year, the cost of the functions in aggregate, is not more than £150 per head.
If these conditions are not met, the provision of the party will trigger an associated benefit-in-kind tax charge.
The exemption only applies to annual functions. This requirement may catch out the unwary.
An annual function is a recurring event that is held each year. Consequently, if you hold a party for staff each year, the event will be an annual event and, as long as the other conditions are met, will fall within the scope of the exemption. However, the exemption does not apply to one-off events. Unfortunately, this means that if you hold a Christmas party this year as a one-event, the exemption will not apply; a tax charge will arise on the benefit provided to the employees by virtue of their attendance at the party (and that of any guests that they bring).
Open to all employees
The annual party exemption features an ‘all employee’ condition. This means that the exemption will only apply if all your employees are able to attend the party. If you operate from more than one site, the condition is met if you have a party for all the employees at a particular location. HMRC have confirmed that where your workforce is split into teams or departments, annual team or departmental events will qualify for the exemption as long as all your employees, or all those at a particular location, are able to attend a party.
The exemption does not apply to an event for a limited number of employees only, for example, a party for senior management.
Cost per head limited to £150
Annual events that fall within the ambit of the exemption are subject to a financial limit of £150 per head. The cost per head is found by dividing the total cost of the event, including any associated transport or accommodation which may be provided, by the number of people attending. This is the total number of people, not just the number of employees, and includes any guests who may have been invited. The cost includes VAT, even if this is subsequently recovered.
Limit not allowance
It is important to note that the £150 cost per head figure is a limit not an allowance. If the cost per head figure is more than £150, the total amount is taxable, not just the excess over £150.
If you hold more than one annual function each tax year and each event meets the all-employee condition, all of the events will fall within the scope of the exemption provided that the aggregate cost is not more than £150 per head.
If the aggregate cost of all the events is more than £150 per head, you can choose how best to use this limit. Remember, it can only be used to shelter ‘whole’ events. For example, if you have three events in the year, and the cost per head of the events is £90, £70 and £50, the exemption is best used to shelter the events costing £90 and £50 (total £140), leaving the £70 event in charge. The ‘unused’ £10 cannot be set against the event costing £70 per head to reduce the taxable amount to £60.
If guests are invited to some functions and not to others, the impact of the guest’s attendance should be taken into account. If the event is taxable and the employee brings a guest, the taxable amount will be the cost of both the employee’s and their guest’s attendance.
Consider a PSA
If it is not possible to provide your Christmas party within the terms of the exemption, you may wish to consider using a PAYE Settlement Agreement (PSA) to meet the resulting tax liability on your employees’ behalf.
We can help
We can help you work out whether the terms of the exemption are met in relation to your Christmas party.