Keeping staff entertained this Christmas

It’s that time of year again when jolly accountants issue festive warnings about the tax consequences of staff Christmas parties. In practice, the issue is much broader than just Christmas because what we really need to look at is the annual, cumulative staff entertaining in general, and that is therefore not just limited to the Christmas party. This article is intended to highlight the broader issues and common pitfalls around staff entertaining.

The key point is that, if an employer spends more than £150 per person in any tax year entertaining staff, a taxable Benefit In Kind (BIK) arises which needs to be reported to HMRC and upon which the employee will (usually) pay tax. Sounds simple enough, however many employers overlook the complexities and nuances of the legislation, which can result in unexpected tax liabilities for staff or sometimes the misreporting of benefits that did not need to be declared. Added to that, there are various urban myths as to what employers can and cannot do in order to avoid a taxable benefit arising. I have highlighted a few of these below.

“If you call it a ‘team building event’ it does not count as entertaining.” 

Whilst it is true that certain events and activities might not be considered to be entertaining (as many who have attended events at which I have spoken will attest) there has to be some significant event or activity and the ‘entertaining’ element of that event must be ancillary to, and commensurate with, that event. You need to be able to reasonably demonstrate that there was some substantive event and that the principle purpose of the event was not to entertain staff.

“If we invite a few customers, it does not count as staff entertaining.” 

Again, whilst it is true that certain non-staff entertainment events might not be considered to be staff entertaining for these purposes even if attended by staff, you will still need to be able to demonstrate that the principle purpose of the event was not to entertain staff i.e. if there are more staff than non-staff, you may have a hard time convincing HMRC that it was not staff entertaining.

“The £150 is an allowance that you can pay to staff.”

Just no.

“The £150 is per person attending the event, so guests of staff help keep the average cost per person down.”

This one is correct BUT the cost of a staff guest is added to that staff member’s cost which then might take them over the £150 allowance.

“I can give out gifts to all staff at Christmas up to £150.”

Again, not strictly correct. There has to be an entertainment event, and the member of staff has to attend that event. Gifts can be part of that event, but (i) a gift without an event is not ‘staff entertaining’; and (ii) some gifts may be treated as taxable even if the overall cost is less than £150.

“I can give the staff cash as part of the £150.”

Again, just no.

Whilst the focus of this article is the income tax consequence of staff entertaining, you may also need to consider whether there are any VAT consequences to any event such as (i) the disallowance of input VAT, particularly on the costs associate with non-staff attendees; and (ii) the VAT consequences of making cumulative gifts of more than £50 to the same person in any 12 month period.

There are a few practical things that can be done to avoid falling foul of the BIK rules:

• Keep a record of the staff entertaining events in the year, the costs and attendees, and monitor this throughout the year
• Make sure that you clearly identify and evidence substantive events where the entertaining was not the primary purpose of the event, as these costs will be excluded from the £150 limit
• Make sure that you clearly identify costs that can be excluded from the £150 because they fall within the ‘trivial benefits’ exclusion (which broadly covers certain items that cost less than £50 to provide)

And finally, if you cannot avoid overstepping the £150 limit, you may be able to agree a PAYE Settlement Arrangement with HMRC whereby you also pay the employees’ tax liability. You have to obtain HMRC approval in advance to use such a scheme, and it adds a relatively large on-cost to entertaining but, hey, it’s Christmas!

Happy entertaining!