Spreading Holiday Cheer with Tax-efficient Christmas Parties and Gifts

As the holiday season approaches, employers can spread cheer among employees tax-efficiently by leveraging exemptions for annual parties and trivial benefits. Here’s how to make the most of these opportunities:

Christmas Parties

To ensure your Christmas party is tax-exempt, the following conditions must be met:

1. Annual Event: The party must be an annual occurrence; one-off events are not eligible.
2. Inclusive Invitation: The event must be open to all employees or all employees at a particular location.
3. Cost Limit: The cost per head, including VAT, must not exceed ￡150.

Important Considerations:

• If the event is for employees at a specific location or department, all employees at that location or within that department must be invited. Events exclusive to a particular grade, such as managers only, do not qualify for the exemption and are considered a taxable benefit.
• The cost per head includes all expenses, such as transport and accommodation, divided by the number of attendees (employees and guests). This total includes VAT, even if later reclaimed.
• If the cost per head exceeds ￡150, the entire amount is taxable, not just the excess. If employees bring guests, the taxable amount covers both the employee and their guest. For example, if the cost per head is ￡175, the taxable amount would be ￡350.
• If multiple annual events are held within the tax year, they are all tax-free as long as the total cost per head does not exceed ￡150. If the combined cost exceeds this amount, the exemption should be applied to maximize tax efficiency.

Gifts

The trivial benefits exemption allows employers to give low-cost gifts without triggering a tax charge under benefits-in-kind legislation, provided these conditions are met:

1. Non-cash: The gift must not be cash or a cash voucher.
2. Cost Limit: The gift must not cost more than ￡50.
3. Non-contractual: The employee must not be contractually entitled to the gift.
4. No Salary Sacrifice: The gift must not be part of a salary sacrifice arrangement.
5. Non-performance-related: The gift must not be given in recognition of services performed or to be performed.

The cost of the gift is determined by what the employer pays to provide it. For gifts given to multiple employees where individual costs are impractical to calculate, the average cost can be used. Directors, office holders of close companies, and their family or household members can receive up to ￡300 of tax-free trivial benefits per year; there is no limit for other employees.

Special Note:

• If the gift involves a season ticket, voucher, or a benefit accessed via an app, the annual cost is considered rather than the per-use cost. This could make the gift ineligible for the trivial benefits exemption if the annual cost exceeds ￡50.

Consider a PAYE Settlement Agreement (PSA)

If a taxable benefit arises from the Christmas party or gifts, consider covering the liability on behalf of your employees through a PAYE Settlement Agreement (PSA). After all, it’s the season of goodwill.

Partner Note: ITEPA 2003, ss. 264, 323A.

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