As many employers make preparations for their annual Christmas party, a word on lesser known tax and National Insurance Contributions matters might make all the difference to everyone’s enjoyment - and their tax bill.

BACKGROUND

Whilst a Christmas party - or any other similar annual event - is clearly staff entertaining, an exemption from tax and National Insurance Contributions applies where the party is open to all employees, or all employees at a location; and the cost per attendee does not exceed £150.

WHAT DOES THE “COST PER ATTENDEE” ACTUALLY MEAN?

First, note that the £150 limit represents the cost per attendee, not the cost per employee, so it’s not just employees that can be counted when calculating the average cost.

Second, “cost” includes all costs relating to the event, including travel and accommodation for example, and all such costs should include VAT, regardless of the employer’s ability to recover VAT or not.

Where the exemption does not apply, the full cost (including VAT) is taxable as a benefit in kind, not merely the amount in excess of £150. Typically, the employer may wish to settle the tax for the employees and their guests where tax arises. Alternatively, if unplanned, this may come as a nasty surprise. Either way, careful consideration of the legislation means it is possible to reduce or eliminate this tax burden.

Third, a word of warning, HM Revenue & Customs currently considers that “cost” means the total gross cost of the event, not the net cost to the employer after taking account of any contributions made by the guests.

In such circumstances, it should be possible to deduct the employee contributions from the benefit arising, but the balance will still be taxable.

IF A BENEFIT ARISES - WHO PAYS?

In short, no tax charge should arise for any guest unless he/she is part of an employee’s family or household.

It shouldn’t be too much trouble to ask employees to indicate whether guests are family or household when confirming whether they will be attending the next Christmas, or other annual party.

As with all things, prevention is better than cure: it may be difficult to establish the facts three years after an event during an HMRC inspection for example. By making a record at the time, it should be possible to reduce the tax and National Insurance Contributions payable where it is known that a party will, or it is subsequently found to exceed the £150 limit. If PAYE Settlement Agreements - the means by which the employer pays tax on behalf of the employee - have been submitted in the past for such costs without taking this point into account, it may be possible to seek a refund.

MULTIPLE PARTIES

The exemption regarding annual parties allows employers to provide more than one party and each will be exempt if the combined cost does not exceed £150.

Where one, or more, event takes the total above this limit, only those parties which take the cost above £150 will be taxable. For example, a Christmas party may cost £120 per attendee, and a summer barbecue £60 per attendee. In this case, the employer will want to claim the Christmas event as tax free (since this is the more expensive): the summer event will then be taxable in full, since that event takes the combined cost over £150. HMRC should accept this approach.

So what is, at first glance, a straight forward exemption can in reality be a complex issue. It is therefore important to consider any planning that may be available as early on as possible.

Making an error which results in the cost exceeding £150 per attendee may result in considerable additional expense to the employer.

Mark Seaden is a senior consultant, employment tax, KPMG LLP (UK)