If HM Revenue & Customs (HMRC) relaxed the rules, for summer parties and work social socials, it could encourage much-needed cash flow into the hospitality sector in city centres, while simplifying what would otherwise be yet more administration imposed on employers and a potential extra tax bill for employees.
With Covid-19 restrictions easing over the coming weeks and the Government encouraging a return to ‘normality’, many employers are considering the option of hosting summer events for staff to compensate for the fact that most firms couldn’t have a Christmas party in 2020. This is also a way of saying ‘thank you’ to employees who have had to work under difficult circumstances, and encourages people to get back to the office. However, the employer’s generosity could backfire and leave workers with an unexpected tax bill.
Summer parties for staff can – like Christmas parties – create a taxable benefit-in-kind charge for the employees involved, as they are not held to be something which is purely for business purposes. Hence employers should understand what costs they are likely to incur for the event – and whether they will have any subsequent events during the year – e.g., a 2021 Christmas party. This will ensure that they are budgeting for the costs correctly and their staff don’t receive any nasty tax surprises.
HMRC rules allow employers to spend up to £150 per tax year, per employee on events such as a summer event or Christmas party. However, the £150 per employee amount is an annual limit. For example, if a company spends £100 per employee on a summer event and another £125 per employee on a Christmas party, the cheaper event represents a taxable benefit in full, not just the amount above the £150 per employee limit.
Employers could in theory pass the tax liability for these costs on to the employees, which I am sure they would not want to do now via P11D forms. In practice, employers will need to settle the costs directly with HMRC via a PAYE Settlement Agreement (PSA).
This means that the employer will have to cover the value of the benefit on a ‘grossed-up basis’. For example, the initial £100 cost for each employee for the summer party could increase to as much as £207 per employee, where the company’s employees are covering the tax and National Insurance contributions (NIC) liabilities for a 45% taxpayer; £100 for the event itself and £107 for the grossed-up tax and NIC’s.
The Government and HMRC should increase the annual limit to £500 on a one-off basis for this tax year only. This would recognise that staff parties were unlikely to have gone ahead last summer or Christmas. It is important for employers to support their staff at this time and a bumper summer social may be much appreciated by employees as a step back to normality and give a boost to bruised city centre hospitality venues.
Would you like to know more?
If you would like to discuss the above or how it may affect you, please get in touch with your usual Blick Rothenberg contact or Robert Pullen.
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