Work Christmas parties could leave staff with hefty tax bill, experts warn

Businesses planning to spend big on Christmas parties this year could leave employees facing a hefty tax bill, experts have warned.

Company bosses who spend more than £150 per head on staff events per year could mean employees paying a taxable benefit in kind on the outlay, they said.

Leading specialist tax firm Forbes Dawson, which works with some of the UK’s most successful business owners and entrepreneurs, said employees could face a surprise tax bill by HMRC if parties breach the threshold.

Under employment tax legislation, staff entertainment is only exempt from tax if the employer pays no more than £150 per person – or an average of £150 to a group of employees if it is impossible to work out the cost per head – each year, including transport.

Andrew Marr, managing partner at Manchester-based Forbes Dawson, said: “For the exemption to apply, it is also necessary that all employees be invited. Therefore, banning the guy who threw up on the boss’s wife last year could technically have costly tax consequences.

“If the benefit is taxable, it must be included on the employee’s end-of-year P11D form. They will pay tax on the benefit at their marginal rate (up to 45%). The company will also pay 13.8% Class 1A National Insurance.”

Forbes Dawson recommends allowing staff to invite guests to the party to spread the average cost across a greater number of people.

“One consequence of opening up an event to employees’ guests will be to increase the numbers for the purposes of calculating the cost per head,” Marr said.

“Although costs will also increase, this is unlikely to be linear as some ‘fixed’ costs such as taxis and venue hire can be shared over a greater number.

“In practice, very few employers allow their employees to suffer a taxable benefit for Christmas parties. They deal with this through a PAYE settlement agreement – whereby the business covers the burden of the tax – but this can often be an avoidable cost to the business.”

He also warned company owners who spend more than £50 per person on staff Christmas gifts they could be unwittingly leaving employees with tax to pay.

“There is an exemption for ‘trivial benefits’, where the cost does not exceed £50, provided the gift is not in cash or cash vouchers, performance-related, or part of a contractual obligation, including salary sacrifice arrangements,” Marr said.

“Employers must, therefore, be very careful when buying expensive gifts for staff.

“Clearly these gifts will still be a marginal cost – albeit less expensive – to the business.

“HMRC is very clear on how much can be spent on treats for employees. It is important to ensure gifts remain under the tax threshold or staff could be in for a nasty ‘tax hangover’ in the New Year.”