Christmas party 'could bring tax shock'

Employers could scupper the season of goodwill by leaving their staff exposed to a tax charge after their Christmas party, accountants have warned.

Employees may be liable for a tax charge if their bosses spend more than £150 per head during the year on entertaining staff, tax rules state.

The £150 allowance had not changed since June 2003, said tax partner Andy Sanford, of Blick Rothenberg.

He said that firms should monitor expenditure or face affecting morale.

Entertainment of staff is considered by HM Revenue and Customs (HMRC) as a benefit in kind which is taxable. So after the £150 allowance, a tax bill could be levied on individual employees.

However, firms could enter a settlement agreement that would ensure employers covered the cost, rather than employees.

"[That] would be a nice Christmas present," Mr Sanford said.

"Matters could be simplified by there being no taxable benefit on individuals, with the company bearing the tax on parties and celebrations."

Meanwhile, the Institute of Chartered Accountants in England and Wales (ICAEW) has highlighted the difference between some items seen at Christmas in terms of VAT.

VAT - a sales tax of 20% - is generally levied on "luxuries", but many "essentials" are VAT-free.

This means that children's clothes are not subject to VAT, but adults' clothes are.

The ICAEW also points out that shelled and salted nuts are considered to be luxuries and are subject to VAT, but unshelled nuts are free from VAT.