While Christmas is one of the few times of the year when you and your employees can let their hair down, you still need to be on your guard. There’s nothing wrong with being generous this Christmas – however, if things get too out of hand, there could be tax implications.
It’s all too easy to let things get out of hand at Christmas. Most businesses find themselves incredible busy just before Winter kicks in. As such, a Christmas party is a great way of losing some stress and building camaraderie amongst your team. If you’re planning the Christmas party for your employees this year, you need to be aware of the possible tax implications.
What is the Annual Limit for Staff Entertaining?
In the past, the annual limit for entertaining staff hasn’t really been a problem for most businesses; particularly smaller businesses. However, with changing business culture, more employers are taking their employees out more often.
Company nights’ out, team-building exercises and other employee entertainment has become a more integral part of workplace culture. As such, it’s all too easy to forget that there are limits to what you can spend on entertaining staff before it has implications on your tax returns.
The ‘per head’ factor (£150) is a figure which is based on all attendees of the event. For examples, if employee family members are invited, and the figure exceeds £150, employees will be taxable on the additional amount they have used. This includes any additional amount which was allocated to their family members, partners or guests.
For example, say you set up a Christmas party at a local venue. The overall cost of the Christmas party comes to £4,500. You have 10 employees and they each bring a guest with them. In this instance the total cost of the party (£4,500) is divided by the number of employees (10). As such, each employee would be taxable on £450 as it is the entire cost that becomes a benefit, not just the amounts in excess of £150 per head.
Unfortunately, you cannot use the annual tax exemption to cover part of an event. For example, if you hosted a Christmas party which cost £200 per head, you couldn’t use the tax exemption. You would not be able to pay additional tax on only the £50 excess (£200 party minus the £150 exemption). For those events exceeding the annual limit, the whole amount will be taxable.
What if you Exceed the Limit for Entertainment?
If you exceed the annual entertainment limit, you and your employees will need to pay additional tax. The whole amount of the entertainment event will be taxable on your employees as a ‘benefit in kind’. In these cases, P11Ds will need to be prepared as part of your tax returns. The overall cost of the additional tax will be allocated amongst your employees.
In addition to your employees having to pay tax on the entertainment, you will also be required to pay. As part of the tax, you will need to pay class 1A National Insurance. This currently runs to the total 13.8%.
If you’re feeling particularly generous, it is possible for the business to assume your employees’ tax liabilities – related to the party. However, be aware that you will then owe National Insurance on the total cost and on the overall tax settled. This is known as a PAYE Settlement Agreement (PSA).
Is it possible to reclaim the VAT on staff entertainment?
If your business is VAT registered, in many cases it is possible to reclaim the Value Added Tax (VAT) on staff entertainment. However, you should be aware that this is not applicable if the event was Partner-only or Director-only. Additionally, if family members (or other guests) of employees are invited free of charge, then you will not be able to reclaim all VAT.
It is important to note that the £150 per head limit is only relevant regarding “benefit in kind rules”. Any amounts spent on staff entertainment throughout the year will be deductible in the employer’s business tax computation.
Do I need an experienced accountant to handle my tax returns?
It is an unfortunate truth that, due to changing workplace attitudes, many businesses reach this threshold long before the Christmas period. As such, an experienced accountant can help to save all kinds businesses a great deal of money when their tax is due. If you want to lower the amount of tax you pay, without breaking the law or running foul of HMRC, get in touch with DRJ today.
Even if you think you’re doing your best for your employees, it is easy to get caught out by unexpected taxes. Whether you’re planning your Christmas party, or you want to be able to look after your employees all year round, the DRJ Accountancy team are here to help you.
Here at DRJ Accountancy, we specialise in helping our clients to get the most out of their money. Thanks to our general accountancy services, we can make sure you’re paying the right amount of tax. If you want to ensure that your tax returns are filled in correctly, and you avoid those terrifying letters from the HMRC, we’re here to help.
If you have any questions or concerns, you can call our experienced team today. You can reach us directly by calling 01937 581356. If you prefer, you can also send any questions or concerns through our simple online contact form, and we’ll get back to you as soon as possible.