Beware the potential tax pitfalls of the office Christmas party

13 November 2018

At this time of year we remind employers that the cost of parties and staff functions are not taxed on employees as a “benefit” if the amount is less than £150 per attendee.  In most cases it is clear whether or not the cost is within, or over those limits. The limit is a cliff-edge; if the cost is £151 each, the full amount is taxable.

We are seeing far more cases where the costs may work out at marginally more than £150 per person.  As most employers volunteer to pay any tax due on the staff benefits of a social function, for obvious reasons, resulting in grossing up (“tax on tax”) this is an easy target for HMRC – they receive more tax and do not have to pursue many employees for relatively small amounts.

The increasingly common question, where the amount is close to £150 each, is exactly how the cost per person should be calculated.  HMRC’s guidance is silent, apart from stressing that it is the VAT inclusive costs, even if the employer can reclaim the VAT, and that incidental costs such as travel, accommodation etc. are included.  In practise, HMRC say that one simply works out the total cost and divides it by the number of persons attending – (not the number of employees).

Apart from the dubious  logic of treating all the attendees as receiving the same value of “benefit” – an abstemious vegan might derive less benefit than another wine-swilling attendee, or the elderly ex-hippy might not enjoy the 1980s tribute band – there are some more serious situations where HMRC’s methods can result in unfair tax charges.  Examples (some of which are true) are as follows.

A company with 20 staff organises a Christmas dinner at an inclusive price of £148 per head. They also pay the taxi fares home for two employees who live 20 miles away from the function, adding £100 to the cost. The “cost per head” of the function is now £153 – the full amount of £3,060 is taxable.  The actual cost is £148 each for 18 staff, and £198 for the two staff who travelled by taxi.

A company with 75 staff holds a dinner for all of its staff at a price of £9,000 (£120 per head). However, there is a snowstorm and due to transport disruption, only 50 staff make it to the dinner. The cost per attendee becomes, according to HMRC, £180 per head and is fully taxable, despite the real benefit to those who attended being only £120.

A company has a gala drinks and canapés evening and invites its 75 staff and 100 guests costed at £120 per head. There is no taxable benefit.  Most of the guests are frankly disappointed (perhaps by the Abba tribute band) and leave after 15 minutes, leaving the 75 staff to consume around £250 each worth of drinks and food.  There is still no taxable benefit on the staff.

At the Christmas function for 20 employees costing £130 per head, one staff member falls through a window causing £3,000 of damage which the company discretely pays.  The cost of the function is now £280 per head.

After the Christmas party, 10 directors adjourn to a nightclub and clock up a bill of £1,000.  HMRC interpret this as being “part of the costs of the function”. If that takes the total cost over £150 per person, all of the staff are taxed on their “benefit” even though the majority were not at the nightclub.

HMRC apply their rules literally, so it is worth being careful, as well as mindful of any other event on the same date as a Christmas party – awards or prize giving, drinks or snacks in the workplace, taking staff to a sports event, show or the cinema… all of which HMRC have maintained in the past are “costs of the annual function”.

To discuss the potential impact on your tax affairs, please contact your usual UHY adviser. Alternatively, fill out our contact form here.