Tax-Free Christmas Parties and Gifts- Christmas Parties

Many businesses organise a Christmas event for their employees. This may take many forms, ranging from a traditional party to events such as escape rooms and cocktail making. Depending on the cost and nature of the event, employees may be left with a tax charge under the benefits in kind legislation.

However, this can be avoided if the event falls in the scope of the tax exemption for annual parties and functions (found in ITEPA 2003, s. 264). For this to be the case, the party or function must be an annual event which must be available to all employees, or all employees at a particular location. In addition, where there is only one annual event in the tax year, the cost per head must be £150 or less.

In seeking to bring a function within the scope of the exemption, some points are worthy of note. At the outset, it is important to realise that the exemption is only available in respect of annual events; as the name suggests, these are events that are held every year. For example, if an employer always holds a Christmas function in December, as long as the other necessary conditions are met, the exemption will apply. However, it will not be available in respect of a one-off event, even if the other conditions are met.

The exemption is an inclusive exemption and only available if the annual event is open to all employees or, where the employer operates from more than one site, those at a particular location. HMRC have confirmed that departmental events open to all employees working in that department will qualify. However, events for particular groups of staff only, such as senior managers, do not meet the ‘all employee’ test.

The exemption is also subject to a cost cap, and an annual event or function will only qualify if the cost is not more than £150 per head. The cost per head figure is simply found by dividing the total cost of the event (including any associated transport and accommodation) by the number of attendees. This includes both employees and guests. The cost figures are inclusive of VAT, even if this is subsequently recovered by the employer. If the cost per head exceeds £150, the full amount is taxable, not just the excess over £150.

If the employer holds more than one annual event, they can decide how best to use the exemption. If the total cost per head of all the events is £150 or less, as long as the events meet the other conditions, they can all be provided within the terms of the exemption. However, if the combined cost of all the annual events in the tax year exceeds £150 per head, it will be necessary to decide how best to use the exemption. Where the exemption is used to shelter more than one annual event from tax, it can only apply to whole events.

When deciding how best to allocate the exemption it is necessary to consider the impact of guests and the taxable amount if the exemption is not available. Where an employee brings a guest and the exemption does not apply, the benefit in kind charge will reflect the cost of the employee’s attendance and that of their guest (so twice the cost per head figure).  If employees are able to bring guests to some functions but not to others, this will impact on how best to allocate the exemption.