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Party Time

Christmas is often a time for annual staff events. The rules changed last year, with the Inland Revenue surprisingly becoming more generous - not every employer will be keen to give the staff what the law now allows. But the rules are surprisingly complicated, so here's a reminder. The Revenue allow an employer to provide an annual staff function without creating a tax charge on any employee, provided that everyone is allowed to attend, and the cost is no more than £150 per person attending (including VAT). That could be a fairly lavish party, and the employee can bring the other half and even the children (if that would not break the bank or make the event too restrained). It's also possible to have several cheaper events throughout the year, as long as they each meet the conditions and the total doesn't go above £150. The employer should be able to treat the cost of the party as a tax-deductible expense, as long as the party is to promote good relations and morale. It will be 'wholly and exclusively for the trade'. But it will not be possible to claim the proprietor's own party costs as an expense - you are supposed to deal with your own morale. For VAT, the rules are slightly less generous. You can claim back the VAT on the cost of a staff party, but you can't claim the VAT that is incurred on entertaining people other than employees. So you have to disallow the cost of the other halves and the children. If you don't want to have a party, but want to give your staff a Christmas present instead, the rules are reversed - the cost of the gift will be a chargeable benefit for income tax, even if it is less than £150, but the VAT will be recoverable and there will be no output tax if the cost is not more than £50. The rules are probably too complicated to understand even before the Christmas party, and impossible the morning after - if you want to check the consequences of what you want to do, we will be happy to help. The rules on annual staff functions are now contained in the legislation at s.264 ITEPA 2004. Previously the exemption relied on an extra-statutory concession. The VAT rules were established in a number of Tribunal cases, in particular those involving Ernst & Young and KPMG. The E&Y case established that charging non-employees to attend (even if at an amount less than cost) means that input tax can be recovered on the whole of the cost of the function (and output tax only has to be accounted for on the amount received). Gifts to staff enjoy no special income tax exemption, so unless they are given by reason of a personal or family relationship rather than the employment, they would be taxable as benefits in kind. For VAT, they would count as a gift in the course or furtherance of business, so there would be the possibility of an input tax deduction for the purchase and no output tax as long as the item cost no more than £50 (excluding VAT) - Schedule 4 para 5 VATA 1994.