Expenses incurred by an employer on the cost of providing a social function for employees are
taxable except when the Annual Party Exemption applies.
The exemption applies to an annual party (for example, a summer barbeque or Christmas party), or similar annual function, provided for employees and available to employees generally at a location.
However an “annual” party is one that happens once a year on a recurring basis, so
a one-off event (for example a 25th anniversary party) cannot be an annual party. Where there are separate sections or departments, an annual party may be provided for each section (e.g. separate wards in a hospital). As long as the party is available generally to all staff in that section, and the other conditions are satisfied, the exemption may apply.
If you provide one annual function for employees, this is not taxable if the cost of the event per head does not exceed £150.
Two or more functions
If you provide two or more annual parties or functions, there is no tax to pay in respect of the party, or parties, for which total cost(s) per head do not exceed £150.
HMRC do not expect you to keep a cumulative record, employee by employee, of functions attended. But for each function the cost per head should be calculated. The cost per head of subsequent functions should be added. If the total cost per head goes over £150 then whichever functions best use the £150 are exempt, the others are taxable.
Exemption not allowance
If the party costs more than £150 a head, it is taxable in full, not just the excess over £150.
The cost of the function includes VAT, the cost of transport and overnight accommodation,
if provided, to enable employees to attend. To get the cost per head divide the total cost of each function by the total number of people (including non-employees).
Since April 2016 employers have also been able to spoil their employees with small benefits that do not count as taxable perks. This is called the trivial benefits exemption. If an employer provides a benefit to its employees, such as a party, it is not taxable, under this rule, if all the following conditions are satisfied:
• the cost of providing the benefit does not exceed £50 per head;
• the benefit is not cash or a cash voucher;
• there is no contractual obligation, including salary sacrifice;
• the benefit is not provided in recognition of particular services performed by the employee (or in anticipation of such services)
If any of these conditions is not satisfied then the benefit is taxed in the normal way, subject to any other exemptions or allowable deductions.
What about reporting to HMRC?
For functions that are taxable, directors and employees, have to pay tax on the full cost per head in respect of:
• themselves and;
• any members of their family and household who attend as guests
A PAYE Settlement Agreement (PSA) allows an employer to make one annual payment to cover all the tax and National Insurance due on minor, irregular or impracticable expenses or benefits for their employees. A party can be included in a PSA as it would be impracticable to operate PAYE.
More detailed Guidance on what can and cannot be included in a PSA can be found at: https://www.gov.uk/paye-settlement-agreements/whats-included
For more information, speak to one of our team
This summary is published for the information of clients. It provides only an overview of the main points, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.
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