To be generous or not? That is the question employers often ask themselves around the festive season. The CIPP policy team has run a number of polls to see how employers utilise the opportunity Christmas presents – and consider the impact the tax system has on that generosity.
In asking if the cost of income tax and NICs are considered when deciding what is included in Christmas reward schemes, it was revealed that only 15% of respondents considered these costs in their decision making, with a further 5% recognising, only after the event, that they should have been. For the majority (42%) tax planning did not play a part in Christmas celebration planning.
Moving away from the tax burden for a moment we went on to ask the reason for such festive generosity and 75% do so, simply to say, ‘thank you’. For a small number (12%) tradition remains a strong motivation for doing so.
Barely a year goes by where we don’t receive a salutary message from a legal specialist warning about the risk to the employer caused by ‘excess’ at the Christmas party but nevertheless these warnings are not enough to prevent nearly half of employers providing and covering the full cost of the staff Christmas party.
Returning to the administration burden of the tax system, we asked: “How will your employer process the value of your seasonal gift?” Tax savvy employers lead the way with 29% of respondents ensuring that their generosity fell within the trivial benefit rules.
Prior to April 2016, there was no statutory limit below which benefits would not be taxable – a subject that has been the cause of many a debate between the employer, their adviser and HMRC for some time. The news that HMRC had accepted the recommendation from the Office of Tax Simplification (OTS), in a bid to increase administrative simplicity, was indeed welcome.
For a gift, or token, to be considered a trivial benefit, however, it must meet certain criteria:
- It must cost £50 or less to provide
- It must not be cash or a voucher that can be exchanged for cash
- It must not be a reward for the work or performance of an employee
- it must not be given as a result of contractual entitlement.
Gifts (which aren’t only given at Christmas), are limited only by the imagination of the HR team but increasingly are becoming more imaginative than a mere turkey or bottle of wine. The final cost to a large employer may be significant, but as long as the criteria are met for each employee the principle will apply regardless of the final cost to the employer. And let’s not forget that accurate records to evidence that the criteria has been met must be maintained.
Annual parties and events
As we discovered from the poll results, employers continue to arrange and cover the cost of the Christmas party and yet, as we know from the calls that we receive to the CIPP advisory service, this remains an area that continues to catch out the unwary.
As with any other subject, there is criteria that must be met to ensure that this event doesn’t result in an unexpected tax cost.
As with the Trivial Benefit exemption, the criteria is not just for Christmas, it applies to any social function that fulfils the following requirements:
- it must cost no more £150 per head
- it must be held on an annual basis, and
- it must be available to all employees – however, this doesn’t mean that all employees have to attend.
For an employer with multiple locations, an annual event that is open to all staff based at each location would still count within the exemption. Furthermore, an employer could also provide separate parties for different departments. So long as all employees could attend one of the events, this would fulfil the relevant requirement.
If more than one annual function is held and the total cost per head exceeds £150, only the functions that total £150 or less will be included within the exemption.
Let’s look at an example that expands on this.
Two events are held annually, one at Christmas and one in the summer, and all employees are invited to attend both events. The Christmas party costs £90 per head and the summer fayre costs £75 per head.
Together this totals £165 and so both events cannot benefit from the exemption, only one.
One annual event could take advantage of the exemption leaving the cost of the other to be reported using the P11D process or through payrolling (where voluntary payrolling has been adopted).
Record keeping remains vital to ensure that accurate numbers of attendees to the annual event are maintained (to monitor the cost per head) and in the event that a cost is reportable for the employees that attended.
Much has been written about PAYE Settlement Agreements (PSAs) over this last year, not least because of the simplification measures made as a result of the work of the OTS, together with the impact of devolution on the tax system (specifically as it relates to calculating the cost of PAYE tax met by the employer within a PSA), so I won’t repeat that detail again.
However, we know from our quick poll results that it remains a popular method utilised by the generous employer to meet the tax burden of the employee, that may arise as a result of their festive generosity.
And this brings us neatly on to the results of our final festive poll question, which asked employees: “What personality type is your employer at Christmas?” We gave a number of answer options that ranged from a ‘bah humbug’ to a generous ‘ho, ho, ho’, and it would appear that as 2018 begins to draw to a close, many employees ‘perceive’ their employers to be both.
With a slight majority, 33% cited their employer as being akin to Scrooge, which provides a reminder to the employer that we may not be seen by others as we see ourselves.
However, this was followed closely by 31% referring to their employer as Father Christmas. The Grinch was next in the pecking order at 18% followed by The Snowman employer coming in at 8%.
Merry Christmas to one and all, and may 2019 be less taxing than its predecessor.
About Samantha Mann
CIPP senior policy and research officer