Christmas parties have quite a reputation – not just because there is traditionally at least one employee who gets raucously drunk and behaves inappropriately – but also because of how much a company spends on the party is a point of great debate. If employees feel like a year’s worth of hard work isn’t being rewarded appropriately because the Christmas party is less than generous, or downright stingy, they’re likely to get upset.
But there’s a good reason for businesses to be careful about having an open bar at the Christmas party – and it’s not because of the aforementioned risk of drunken debauchery: it’s actually because there are some quite severe consequences from HMRC if businesses exceed the permitted £150 limit per employee per year allowance for staff events.
Actually, your office Christmas party could cost your business a lot more than you think!
Quite commonly, people book out a luxury hotel. The rule is that, as long as the food and drinks bill comes to less than £150, it’s sorted. But people also expense their hotels, train fares etc. What most people don't realise is that if this total exceeds £150 it becomes a taxable benefit on the employee.
Technically, this cost should go on an employee’s annual tax return: their P11D. But if a business had to put this on someone’s P11D they’d never go to the party, so most companies put it on their PAYE Settlement Agreement instead, and carry the costs themselves.
What happens if costs exceed the £150 limit?
For each employee who pays tax at the 40% rate, going over the £150 limit (theoretically, even by a single pound) costs your company approximately 90% more: nearly double the entire initial outlay! In other words – if your company spends £200, it doesn’t just pay the extra £50 – it pays £50 plus 90% of £200 = £180. So a £200 employee Christmas party (and don’t forget – this cost includes VAT as well as the drinks, transport and accommodation) ends up costing your company £380!!!
So how can you avoid getting on the tax-man’s bad side this festive season? Here are a few tips.
Top tips to keep HMRC happy when it comes to Christmas parties:
- Keep track of employee expenses for the event as this could tip the scales and put you over the limit.
- Don’t forget to close the bar! You can apologise to employees – and blame the tax man.
- Invite ALL employees. Sorry, you can’t have separate Christmas parties and still claim them under the £150 allowance. It’s a no-no under tax rules
- Keep an eye on the ‘gifts’. Don’t forget that there’s a £50 limit on employee gift allowances per year as well. So giving a high-performing individual a nice bottle of wine at Xmas is fine, provided you haven’t given birthday gifts throughout the year.
- Spend less than the £150 tax-free ‘allowance’ permitted by HMRC for staff events each year.
- Don’t send HMRC a thank-you gift. HMRC is extremely strict about benefits to employees – and they apply it themselves.
Don’t forget that one of the easiest ways to keep the tax man happy, at Christmas time or any other time, is to show that you have a policy and can apply it consistently. Expense management software can help make your life easier, and make your business more compliant at the same time. It might even make your employees so much less frustrated with doing their expenses that they’ll even give your finance team a Christmas hug, if they’re feeling really generous (or have had too much wine at the Christmas party).