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Understanding tax exemptions for Christmas parties and trivial benefits

11th December 2024

As the holiday season approaches, many businesses are preparing to celebrate with festive parties and gifts. While these are a great way to reward your team, it’s important to be aware of the tax rules to ensure compliance and avoid unexpected costs. HMRC offers tax exemptions for certain events and gifts, allowing businesses to spread the cheer without incurring additional tax liabilities. In this article the Rowleys Tax Team share more about the exemptions for Christmas parties and what is classed as a ‘trivial benefit’.

The annual events exemption

A staff Christmas party can qualify as a tax-free benefit if it meets the requirements of the annual events exemption. To take advantage of this, your event must satisfy the following criteria:

Open to all employees

• The event must be open to all employees within the organisation.
• If your business has multiple sites, hosting an event at one location is acceptable as long as all employees at that location are invited.
• Separate departmental events are allowed, provided that every employee has the opportunity to attend at least one.
• A party exclusively for directors won’t qualify unless all employees are directors.

Annual in nature

• The event must be a recurring, yearly occurrence, such as a Christmas or summer party.
• One-off events, like a celebration for a milestone anniversary, do not qualify for the exemption.

Cost per attendee

• The total cost, including VAT, travel, and overnight accommodation provided by the employer, must not exceed £150 per attendee.
• Importantly, this is a threshold, not an allowance. If the cost exceeds £150, the entire amount becomes taxable as a benefit-in-kind.

No salary sacrifice

• The event must not be funded through a salary sacrifice arrangement.

How to calculate the cost per attendee

To ensure compliance, divide the total cost of the party (including VAT and additional costs) by the total number of attendees. This calculation includes all guests, not just employees.

Example:

If your Christmas party costs £3,000 and 20 people attend (employees and guests combined), the cost per attendee is £150. This qualifies for the exemption.

Multiple events in a tax year

The exemption can cover more than one event within the same tax year, provided the combined cost does not exceed £150 per person. For example:

• Summer party: £45 per attendee
• Christmas party: £100 per attendee
  Both events qualify, as the total is £145 per attendee.

However, if the Christmas party costs £120 and the summer party £45, the combined total of £165 exceeds the threshold. In this case, you could apply the exemption to the more expensive event (the Christmas party) and treat the summer party as a taxable benefit, typically handled through a PAYE Settlement Agreement (PSA).

Trivial benefits

Employers can also give small festive gifts without tax implications under the trivial benefits exemption. To qualify:

1. The gift must cost no more than £50 per employee.
2. It must not be cash or cash-equivalent.
3. The gift must not be provided as a reward for work or performance.
4. It cannot form part of the employee’s contractual entitlement.

If you are a director (or office holder) of a small limited company with five or less shareholders, the company can provide  you (or members of your family if they are not employees in their own right) up to £300 in trivial benefits, providing each individual benefit does not exceed £50.

Examples of trivial benefits include:

• A festive bottle of wine or box of chocolates.
• A gift voucher that cannot be exchanged for cash.

Planning your festive celebrations

With careful planning and a clear understanding of HMRC’s guidelines, you can make the most of the tax exemptions available for Christmas parties and gifts. From boosting team morale to celebrating achievements, these exemptions offer a practical way to end the year on a high note.

Need advice on handling the tax implications of your festive plans? Contact our friendly Tax Team for personalised advice.