My VIP Tax Team question of the week: Associated Companies

My client is currently planning their staff Christmas party. This year they have started to hold an annual staff summer event as well. Therefore, will the Christmas party now become a taxable benefit each year and not be able to benefit from the exemption?

S264 ITEPA 2003 details an income tax exemption for annual functions. The exemption is not restricted only to a Christmas party, it can used for alternative annual functions during the year. The exemption must be used for annual functions so for functions that can happen again the following year. For example, the exemption cannot be used for a one-off function such as the 10th anniversary of a business.

Another condition of the exemption is that the function must be open to all employees or all employees in one particular location.

The total value for an annual function which is exempt from Income Tax is £150 per head. ITEPA 2003 S264(3) explains that if more than one annual function is held within in a tax year, the cost of both functions will remain exempt from Income Tax as long as the combined cost per person for both functions does not exceed £150 per head.

For example, if the client’s summer party cost was £50 per head, then as long as the cost per head at the Christmas party was £100 or below then both parties would be exempt from income tax as the combined cost of the parties per head is exactly £150.

If the combined cost does exceed £150 per person, then only one function cost will qualify for the exemption. The whole cost of the second function would become a taxable benefit to the employees not just the excess above £150.

Therefore, if the combined £150 per person limit is breached, the benefit of the second function needs to be reported as such to HMRC. This can be done via payrolling the benefit if the client has registered for this or by submitting a P11D form for each employee that attended. Alternatively, the cost of the second function could be reported on a PAYE settlement agreement with the approval of HMRC so the employee is not impacted by an additional taxable benefit.

When calculating the cost of the function per head, the VAT and the cost of transport and/or overnight accommodation if the employer is providing this must also be included. The total cost of the function can be divided into the total number of attendees including non-employees to arrive at the cost per head.

Further information can be found in EIM21690 with examples of how the exemption can be used in EIM21691.


Please share this article with your clients

It’s not easy to make 100’s of Accountants happy, and that’s what we did last year ! Previously known as Accountants in Business (AIB), Croner-i are back this year with a new conference for accountants in Business and Practice. Rated 5 ★★★★★ by previous attendees, this essential annual update has been designed specifically to keep you up to date with the latest changes in Tax, Financial reporting, Company Law and much more. Register your interest!

Back to Community
mm

Payroll Adviser
0844 892 2470


Sue is a Payroll Adviser on the tax consultancy advice lines. Sue has over 20 years of payroll experience gained both from working in a payroll bureau for a chartered accountants and more recently as a payroll manager for a large retail company.

My VIP Tax Team question of the week: Tax relief on cost of surgery
My VIP Tax Team question of the week: Claiming Gift Aid relief for the previous tax year
My VIP Tax Team question of the week: Transfer of interest in partnership