What you need to know: The TAXING issue of Christmas Party Budgets and Bonuses

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THE OFFICE -- Season 2 -- Pictured: (l-r) Rainn Wilson as Dwight Shrutte, Jenna Fischer as Pam Beesly, Steve Carell as Michael Scott, B.J. Novak as Ryan Howard, John Krasinsky as Jim Halpert -- Photo by: Paul Drinkwater/NBCU Photo Bank

THE OFFICE -- Season 2 -- Pictured: (l-r) Rainn Wilson as Dwight Shrutte, Jenna Fischer as Pam Beesly, Steve Carell as Michael Scott, B.J. Novak as Ryan Howard, John Krasinsky as Jim Halpert -- Photo by: Paul Drinkwater/NBCU Photo Bank

It’s Christmas time, so goodwill to all men, women, employees, staff, contractors..….that is unless you’re dealing with budgets and the HMRC, in which case you still need to tow the line and know where you stand!

Christmas parties, annual bonuses and their funding can be a minefield. Designed to thank staff for all their hard work during the year, create a comradely atmosphere, engender goodwill for the company and incentivise staff for the year ahead – they can easily fall flat if managed wrongly.

So what do you need to know to ensure your party doesn’t poop and your Brucey bonus is met with a cheer rather than a sneer.

Christmas parties

From a tax point of view HM Revenue gets pretty festive (for them) at this time of year, but you need to know what you’re doing as it’s always a favourite spot check for auditors!

Here’s what you need to know..

  1. Providing your Christmas party is ‘an annual event’, costs £150 or less per head and is open to all your employees you don’t have to pay tax, National Insurance or report it to the HMRC.
  2. Also, if your business is multi-site but you have one big party or you want to have separate parties for different departments, these are also allowable as long as all of your employees can attend one of them.
  3. If you have a summer and Christmas party for instance – as long as the combined cost is less than £150 per person per annum, it’s still exempt.
  4. BUT if your annual entertainment expenses are over £150 per person you must then report this on each employee’s form P11D and pay class 1A National Insurance on the full cost of the event.

Now all you have to do is decide, when and where to hold it to make sure everyone has a good (but not too good!) time!

Incidentally, my top five tips for value for money for a Christmas bash are:

  • Look at lunch options (often much cheaper and better value).
  • Consider a shared Christmas parties in a large venue – often these are great fun and the larger scale enables cost savings.
  • Negotiate with your venue – you’ll get more flexibility on price and offer on a Monday lunch than a Thursday/Friday night.
  • Look at location – somewhere with good transport links for your staff to get to and from is often important but slightly off the beaten track is also where you’ll get better value.
  • You probably need to have some booze allowance, but it needn’t be excessive – you don’t want to be responsible for getting everyone plastered!

Also, don’t forget, depending on what line of business you’re in, a nice touch and ‘free perk’ can be closing the office for the key Christmas days, providing your customers won’t be needing your services. Given the time of year, many businesses will encounter minimum loss of revenue and production while gaining goodwill at a minimal cost.

Bonuses

Before we even start with the tax side of this, the key with bonuses is that you need to have a system and that system needs to be fair. That’s not to say it has to be even, but fair – without favouritism or discrimination – or you risk your well-intentioned bonus turning into a divisive source of contention.

Depending on your business and your aims of giving the bonus, your system should be based on a three key factors.

  • You need to decide whether you are rewarding the company, team or personal performance – or a combination of all three (and what weight each part will play).
  • It’s also important to know what you’re basing the bonus on – sales figures, company revenue, completing a specific project, developing new/existing business etc.
  • And finally, how are you going to measure (and reward) performance with realistic, achievable and clearly definable targets.

So what about the tax?

Whatever you decide to base your system on, there are tax implications on all cash and bonus payments (including vouchers – HMRC definitions can be found here). You will need to pay tax, National Insurance and have reporting obligations.

With cash – it counts as earnings so you need to add it to their other earnings, deduct and pay PAYE tax and Class 1 National Insurance through payroll.

With non-cash – it depends on the item but you may still have to use PAYE if you’re giving staff something that can easily be converted to cash.

Payment Considerations

Amount – Bonuses can be based on many different calculations including a % of salary/new sales/gross profit of sales, invoice value or just a flat rate. It must be enough to matter, but not so much it’s unaffordable to the company and should only be payable once the expense of recruiting a new employee has been recovered.

Bonuses can be discretionary or guaranteed – ideally for company flexibility it should be described as “variable, discretionary, non-contractual and subject to Company review at any time” (although it’s worth noting that in any legal dispute precedent will be taken into account).

Performance related bonuses should be paid only after a basic threshold has been exceeded and should ideally be uncapped but self-financing. It’s also possible to consider a sliding scale for your bonus scheme.

 Timing – if you’re basing a bonus on sales figures make sure that bonus payout allows time for your business to have received the cash benefit from the sales and established that the new business was bona fide.

Timescale – do you want to give an annual bonus at just Christmas, or would you rather incentivise staff throughout the year with smaller quarterly bonuses (often a good idea for sales-related jobs). This is especially important when it comes to employees leaving – where employee entitlement needs to be clear regarding notice periods etc.

And finally, when it comes to splashing cash – The downside with cash bonuses is there’s always a direct comparable to the previous year and staff can come to expect more and more each year. If you decide cash isn’t the way, then don’t be afraid to be creative.

  • I’ve worked with companies who give a hamper style ‘goodie’ box to all staff equally, no matter what their position, and it contained things like chocolates and champagne to points for the company’s loyalty scheme (a hotel company).
  • Another company distributes a Santa’s wish-list where each employee chooses their own gift – these can range from anything from practical items like household goods, to hampers or vouchers for experiences (a large media company).

WrightCFO is an outsourced Finance Director consultancy specialising   in part-time FD contracts in the SME market. Contact me for a free consultation.

http://www.wrightcfo.co.uk

sophie@wrightcfo.co.uk

Tel. 0208 943 9027

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