Is the company Christmas party a taxable benefit?
Normally, social functions provided by an employer for employees are chargeable to tax as employment income. However, s.264 of the Income Tax (Earnings and Pensions) Act 2003 contains an exemption from the charge to tax. The exemption applies to an annual party, which includes a Christmas party or similar annual function provided for employees, that is either available to employees generally, or available to employees generally at one location, where the employer has more than one business location. Where an employer organises its workforce in one location into separate departments, an annual party may be provided separately for the different departments, so long as a party is available generally to all staff at the location. A directors' Christmas lunch, for example, would not be covered by the exemption because it is not available to staff generally.
If the employer provides one annual function for employees, no charge to tax arises provided that the average cost of the event per head does not exceed £150. If the average cost per head does exceed £150, the full amount of the benefit of the function will be chargeable to tax. If the employer provides two or more annual functions, no charge to tax arises provided that the costs per head do not exceed £150 in aggregate. If the total cost per head goes over £150, whichever function best utilises the £150 is exempt and the other functions are fully taxable.
The cost of the function includes VAT and the cost of any employer-provided transport or overnight accommodation. To calculate the cost per head, the employer should divide the total cost of the function by the total number of people who attended, including any non-employees, and not by the total number of people actually invited.
The figure of £150 is not an allowance. With regard to functions that are outside the scope of the exemption, employees are chargeable to tax on the full cost per head, not just on the excess over £150. To give an example, if a Christmas party costs £100 a head and a summer ball costs £75 a head, the Christmas party will be exempted (as this makes better utilisation of the exemption) but the summer ball will be chargeable to tax in full, not just on the excess over £50. Thus, in this scenario, the employees will be chargeable to income tax on the benefit of £75, not £25. Finally, it is the event that is exempt, not the employee. In the example cited above, if an employee chose not to attend the Christmas party but did attend the summer ball, he or she would still be chargeable to income tax on the benefit of £75 because this event is not exempt. The fact that he or she failed to attend the event that was exempt is irrelevant.