Without the exemption, the provision of a party, or similar function, would be regarded as a benefit in kind and would be taxable where the recipient is a P11D employee (i.e. one earning at a rate of at least £8,500 a year) or a director. However, if the conditions set out in the exemption are met, no tax charge arises. The exemption is only relevant in relation to P11D employees and directors – no taxable benefit arises where the partygoer is a P9D employee.
Scope of the Exemption
For the exemption to apply, various conditions must be met. The first is essentially an `all employee’ condition. This means that the party must be provided for the employer’s employees and available generally or to those at a particular location. Exclusive events are not tax efficient, however, it is possible to limit the invites to a particular department or to staff at a particular location without there being a problem. What is important is that all the employees in the department or at the location in question are invited.
Where only one annual function, such as a Christmas party, is provided, the cost of that function must not exceed £150 per head to fall with the scope of the exemption.
Cost Per Head
The cost per head figure is exactly that – the cost to the employer of providing the party or function, divided by the total number of people attending. This can get confusing at this point because guests, as well as employees, are taken into account in the calculation. This offers some planning opportunities. If the cost per head figure is marginally above £150, it may be possible to bring it within the tax-free limit by inviting another guest or two.
The total cost of the function is the cost of providing the party, or function, plus the cost of any transport or accommodation provided for those attending, irrespective of whether they are employees or not. The figures used in the calculation are inclusive of VAT, regardless of whether this is subsequently recovered by the employer.
A company holds a Christmas party each year. The 2007 party has a fancy dress theme. All employees are invited and each is invited to bring a guest. The event costs the company £8,000 plus VAT to host. Overnight accommodation is provided at a further cost of £2,000 plus Vat.
The event is attended by 47 employees and 34 guests
The total cost of the event is as follows:
(8,000 + VAT) £9,400
(£2,000 + VAT) £2,350
Total cost £11,750
Total number attending:
Cost per head
--------- = £145.06
As the cost per head figure is less than £150, the party will not trigger a benefits in kind charge.
All or Nothing
The exemption is something of an all or nothing charge; the function is either exempt in its entirety or taxable in full. If the cost per head figure exceeds £150, it is not just the excess over £150 that is taxable but the full portion of the cost attributable to the employee or director. This is something of a double whammy because where the employee brings a guest, the employee is taxed on the cost of both of them attending.
This means that while no tax charge arises in respect of a cost per head figure of £149 per head, if the cost is a mere £2 more at £151 per head, a P11D employee or director who attends the function with a guest will suffer a benefit in kind on £302, which equates to a tax bill of £120.80 for a 40 per cent taxpayer. A big bill for a little increase in the cost per head amount!
When planning a staff party, employers should keep a close eye on the cost per head figure. Letting it slip slightly above £150 can be very costly in tax terms. It may be advisable to cut back slightly or invite more people to keep the budget within £150 per head.
Lots of Parties
Where there is only one function in the year, the exemption is pretty straightforward. If the cost per head is £150 or less, it applies, and if it is more than £150 per head, it doesn’t.
The position is slightly more complicated if the company hosts more than one event in the tax year. However, the magic figure remains at £150. Again, the all or nothing rule applies meaning that a function is either fully exempt or fully taxable. There are no half measures.
The exemption can be utilised to cover as many whole functions within the £150 limit. This is best illustrated by way of an example.
In a single tax year, a company holds a summer garden party with a cost per head of £60, a Christmas party with a cost per head of £75 and an annual ball with a cost per head of £120.
The exemption is best utilised to take the garden party and Christmas party, with a combined cost of £135 out of charge, leaving the annual ball at a cost of £120 per head taxable.
Where employees are able to bring a guest to some functions and not to others, the position is slightly more complicated. If, in the above example, the Christmas party and summer garden party were for employees only, whereas employees were allowed to bring a guest to the summer ball, it would be preferable to use the exemption to cover the ball, leaving the summer garden party and Christmas party in charge. This would result in a tax charge based on £135, rather than one based on £240 (employee plus guest at £120 each) if the ball was left in charge.
Where there are several functions in the year, it is a case of playing with the numbers to get the best result.
In the event that the employer wishes to throw a lavish function and the cost per head exceeds £150, the employer may wish to meet the associated tax charge by way of a PAYE settlement agreement (PSA) rather than passing it on to the employee. Where this route is taken, the employer will pay Class 1B NICs in place of the Class 1A liability that would otherwise arise.
While taking the PSA route may add to the costs of the event, the additional costs may be worthwhile to preserve employee goodwill. A tax bill is a sure-fire way to dampen Christmas spirits.
When planning a Christmas party, it is advisable to consider the tax implications alongside the more interesting considerations, such as the venue, the entertainment, the food and the drink. Keeping the total cost per head of all functions in the year below £150 will mean that they will stay tax –free. If a tax bill cannot be avoided, it may be preferable to settle it by way of a PSA, leaving employees free to enjoy the party.