Mark Pryce

Mark Pryce, head of corporate tax in Scotland for Azets, has warned that it is easy to fall foul of the legislation regarding exemptions and land staff with a share of the costs as a benefit in kind (BIK).

He said: “To be exempt from tax and National Insurance (NI), parties or similar social functions – including online or virtual parties – must be open to all employees, be annual (such as a Christmas party or summer barbecue) and cost £150 or less per person.

“It has been a tough year in many respects so it is only natural that many businesses will want to reward hard-working staff with a morale-boosting Christmas party. However, while there is usually no need to inform the tax authorities of such events, business leaders and directors need to avoid overspending and then having to report the tax implications to HMRC.”

He continued: “The £150 limit, which has not been changed since 2003, includes the cost of the function and associated travel, such as taxis, or hotel accommodation, including VAT and is then divided by the total number of attendees not just the number of employees.

“The £150 limit per person is an exemption and not an allowance and the entire cost would be subject to tax and NI if the figure was exceeded, even by just £1. The £150 limit applied to an aggregate of multiple annual events, not just the Christmas party, with all being subject to tax if the figure is exceeded.”

Mr Pryce explains there two courses of action if businesses felt the threshold was in danger of being exceeded. He said: “Businesses can report the cost of the party to HMRC as a staff benefit in kind with staff paying tax on their share of the cost, but that does not reflect well on the employer.

“Alternatively, if a business struggles to avoid going exceeding the limit, they can use a PAYE Settlement Agreement (called a PSA) which allows employers to make one annual payment to cover all the tax and NI due on minor, irregular or impracticable expenses or benefits for employees.”

He noted that if spouses or partners were also invited to the party, it would trigger an extra £150 exemption limit. Employers can also take advantage of HMRC ‘trivial benefits’ for which no reporting was required and tax or NI payable if conditions were met, to give a boost to staff, particularly at Christmas. A trivial benefit should cost £50 or less to provide, is neither cash or a cash voucher, is not a reward for work or performance and is not in the terms of a contract.