This guidance note summarises the key points for institutions/schools, etc. who may be considering providing either seasonal (e.g. Christmas) parties or gifts, to ensure no additional, unintended costs are incurred.
Key principles
When providing entertainment to staff, e.g. food and drink at a staff party or gifts, the following criteria should be met:
- all expenditure must be “reasonable”, in terms of both cost and frequency;
- entertaining (food and drink) costs should be restricted to the University’s subsistence rates;
- entertaining should ideally take place on University (or College) premises – to avoid any additional tax costs (see below); and
- all costs should be approved in advance by the person authorised to approve an expense claims.
In terms of the reasonableness of the expenditure, it must be neither excessive nor inappropriate. You should be comfortable that an external observer would see the event as an appropriate use of charitable funds.
Procedure
Details of all events and attendees should be retained, as well as details of any items provided/reimbursed. These should be reported as part of the annual tax year-end benefits reporting process. Where expenses are reimbursed, receipts should be retained to evidence proof of underlying spend.
Tax implications
Staff entertainment :
- on University (or College) premises - where "reasonable" staff entertaining is undertaken no additional income tax or National Insurance Contributions (NIC) costs will arise.
- away from University (or College) premises - it is necessary to review the expenditure to determine whether or not additional income tax and NIC costs will be incurred.
Where a staff seasonal (e.g. Christmas) party is held on University (or College) premises, no taxable benefit should arise. On the basis that all spend should only be incurred where it fulfils the requirement of being an appropriate use of charitable funds, i.e., neither excessive nor inappropriate, it is unlikely that any taxable benefit charge would arise in respect of an on-site staff seasonal party.
Staff seasonal parties, which are open to all staff at the same location, will not create a taxable benefit charge, where the following conditions are met:
- the total cost of the event did not exceed £150 (inclusive of VAT), per attendee; and
- the £150 limit (note, not an allowance) includes all costs such as food, drink, venue hire, transport and accommodation, etc.
Please note: where a party is only open to all staff within one department or division, all staff at that location, must be able to attend one party, even if it is not the same party. This includes a “virtual” party (see below).
Where an employee attends more than one similar seasonal party, details of the events and costs should be recorded in order that a determination of the tax treatment can be made at the end of each tax year.
Where a seasonal party is held remotely, e.g. via MS Teams/Zoom, etc. the normal rules would apply to these “virtual” seasonal parties. Accordingly, if some teams decided that they were unable/unwilling to hold an in-person seasonal party but decided to hold a “virtual” party instead, this would satisfy the requirements of offering a seasonal party to all staff at that location.
What this means in practice is that, anyone who actually “attends” the virtual party could receive food and drink, etc. at home in a tax-free manner. HMRC have confirmed that this includes: the provision of vouchers to purchase reasonable amounts of food and drink to consume during the party; delivery of actual hampers/food and drink to consume during the party; and even the reclaiming of actual expenses incurred by the employee of food and drink to consume during the party.
Tax treatment
Details of all events and attendees should be retained, as well as details of any items provided/reimbursed. These should then be reported as part of the annual tax year-end benefits reporting process.
Where expenses are reimbursed, receipts should be retained to evidence proof of the underlying spend.
Where the limits were exceeded, or benefits were provided to those who did not attend the virtual party, the exemption would not apply. In which case, the entire cost would be seen as a taxable benefit; not just the difference between the limit and the total cost. The additional income tax and employer’s NIC would be reported and paid via the annual PAYE Settlement Agreement (PSA) (see below).
The tax treatment of all expenses and benefits will be considered as part of the tax year-end benefits reporting process.
Where an employee does not attend either the party or the virtual party, they cannot be provided with a gift as an alternative. This is on the basis that the provision of such a gift, in lieu of a seasonal party, would risk causing all of the seasonal parties in that employee’s workplace to become taxable.
If you are considering providing any seasonal gifts, please consider:
- any spend should comply with the key principles, i.e., it should be reasonable in terms of costs and it should be appropriate; and
- the gift should not be linked to a ‘thank you’: a gift to say thank you would be seen as a taxable benefit.
Details of all staff entertaining and gifts should be reported as part of the tax year-end process. The return should include the details of the event e.g. Christmas party for X department, attendees and nature of the expenditure. This information will be used to determine whether or not the expense and/or benefits are taxable.
Where a benefit is cincluded on a PSA, the employer is liable for the income tax and employer NIC on the grossed-up value of providing the benefit. This can increase the costs quite considerably. For example, a £51 gift to a basic rate (20%) . higher rate (40%) and additional rate (45%) taxpayer would cost an additional £22.34 (43.81%), £46.79 (91.38%) and £55.67 (108.69%), respectively.