With the festive season about to start, ICAEW is reminding employers that HMRC has a few presents to give out, since staff Christmas parties can be tax-free under rules which allow businesses to spend an annual tax-free amount of up to £150 per staff member on entertainment.
The rules apply to any annual party or similar function, which must be open to staff generally or to workers at a particular location. The tax-free limit applies for a tax year, so if the employer puts on a summer party and a Christmas dinner together costing less than £150 a head, both will be tax-free for employees.
The range of items that can be claimed under the £150 limit goes beyond food and drink, it could also include accommodation and transport home if the employer pays for these. Furthermore, employees can bring along their spouse or partner as long as the cost per head stays under the limit. On top of this, the employer will also get tax relief on the total costs.
ICAEW's advice is timely as the quarterly Close Brothers Business Barometer assessing the economic outlook for SMEs reveals that over 60% of SME owners will host a festive party for staff this year, up 20% on this time last year.
David Thomson, CEO of Close Brothers Invoice Finance, said: 'Christmas parties have fallen victim to the recession over the last few years and this noticeable increase is a positive sign that business confidence is picking up. Staff morale can make a real difference to a company's bottom line, so it's great to see so many employers recognising this and treating their staff with festive celebrations this year.'
Paul Haywood-Schiefer, a personal tax advisor at London firm Blick Rothenberg, cautions that companies must take care to calculate their party costs come in under the limit, saying: 'If the cost does exceed this amount then the event is a taxable benefit for the employees and they will pay tax, not just on the amount over £150, but on the total cost prices.'
Employers who exceed the £150 per head maximum have the option to apply to HMRC to enter a PAYE Settlement Agreement (PSA) which allows the employer to cover the tax and national insurance contributions which the employee would otherwise have to pay. A PSA can also be used so the employer picks up the tax due on a gift given to an employee such as cash or high street vouchers.
Haywood-Schiefer concluded: 'If you really want to give a bit of Christmas cheer to your staff, you could give them an extra day off? There would be no tax or NIC consequences of doing so, the only cost would be for the lack of productivity for loss of a day's work.'