How will the festive period affect your business employee expenses?

Christmas parties are a great way to reward employees for a good years work. These corporate socials encourage team bonding, motivation and loyalty; and following the introduction of the Income Tax (Earnings and Pensions Act) 2003, a previous tax 'concession' for employers giving Christmas parties to staff has been put on a statutory footing.

In effect, the tax-free limit has doubled so that an annual party up to the value of £150 per head is allowable, without the need to account for tax, as long as the party is open to all employees.
The benefit of Christmas parties to the company can greatly outweigh the cost incurred by the employer in terms of increased motivation and loyalty, and can create an enormous amount of goodwill that will last the year ahead. But such activities can be costly and additional tax costs confusing.

If the employer provides two or more annual parties or functions, no charge arises in respect of the party, or parties, when cost(s) per head do not exceed £150 in aggregate. Where there is more than one annual function, for each function the cost per head should be calculated. The cost per head of subsequent functions should be added. If the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt, the others taxable.

Exemption not allowance

The figure of £150 is not an allowance. For functions that are outside the scope of the exemption are chargeable on the full cost per head, not just the excess over £150.

Example:
A company holds two annual dinner dances open to all its employees in the tax year. The total cost of the first, including transport and accommodation provided for certain guests, was £10,000 including VAT. The total number of persons attending was 100 and the cost per head was therefore £100.

The second dinner dance cost £8,000 including VAT, and 100 people attended this. The average cost was therefore £80.

The total cost per head for both functions was £180 so they cannot both qualify for exemption under Section 264(3) ITEPA 2003. Since the cost per head of each party on its own was not more than £150, either event can qualify for exemption on its own but it is more beneficial overall for the first to be exempted. So the benefits arising from that function will not be charged and those arising from the second function will be charged.

For employees who attended:

• Both events, they will be chargeable only on the benefit of £80 for the second event
• Only the first event, there will be no chargeable benefit because that event is exempt
• Only the second event, they will be chargeable on the benefit of £80.

If the average cost per head of each of the functions exceeded £150 the full amount of the benefit of both functions would be chargeable. The £150 is not an allowance to be set against an amount that exceeds that figure.

Should you be encouraging your staff to drink?

Whilst it is good business sense to improve employee moral with a Christmas party, is providing free flowing alcohol good business sense?

For those parties held on a ‘school night’ the next day isn’t going to be very productive. But more seriously over the Christmas period the number of alcoholic related accidents increases and over the past decade this figure has almost doubled (Office for National Statistics). Do you really want to responsible for another alcoholic related incident?

Encouraging staff to drink sensibly, end the night when the corporate party ends and pre-book taxi’s all go a long way in ensuring your staff have a safe and fun work Christmas Party.
You can help keep your employees safer by:

• Ordering bottles of wine for each table to stop frequent trips to the bar
• Banning spirits and cocktails
• Using drink monitors to regulate how much people are drinking
• Pre-booking a mini bus for all employees – this cost should be part of the £150 per head budget to ensure you don’t get taxed!
• Having the party venue out of the town centre to help discourage employees carrying on the party at local night clubs and late night pubs

Seasonal gifts

An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts are considered to be trivial and as such are not taxable. For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned. If a benefit is trivial it should not be included in a PSA.

If the gift extends beyond one of the items mentioned above, for example from a bottle or two to a case of wine, or from a turkey to a Christmas hamper, you will need to consider the contents and cost before being able to determine whether the benefit is trivial.

In such cases you should treat all the factors objectively and use your judgement.
But there are many tax-free ways to reward employees for their hard work over the past 12 months without incurring tax:

Holidays:
One way of keeping the cost of Christmas down and establishing goodwill, is to give additional holiday to employees. British workers work the longest hours in Europe and whilst people talk extensively about flexible working growing in popularity, the reality is that many firms still make it difficult for employees to create the work-life balance.
Giving extra time off during the festive period will help reduce stress, give them extra time to prepare for the seasons festivities and generally improve employee moral.

Pensions:
It may not sound like the most exciting gift but an additional payment into an employee's pension scheme is extremely tax efficient. The payment is made tax-free and will be exempt from NI.

Software (Europe) Ltd actively keeps current with all T&E related tax and VAT issues, however before making any decisions please contact your local HMRC representatives.

To learn more about Expenses visit www.expenses-software.com or call 01522 881300