Updated 20 November: Organisations wanting to provide some festive cheer for their staff this winter face some difficult challenges. ICAEW’s Tax Faculty outlines the tax considerations that employers will need to think about.

The 2020 festive season will be unlike any other. Traditional office parties may not be an option, but organisations still wanting to boost morale after a difficult year will be considering how they can do things differently. 

From online cookery classes, virtual pantomimes and streaming live music performances, to food delivery vouchers and a DIY Christmas party kit in the post, there are a wide range of potential options, but how do these work with tax exemptions for employers?

Annual function exemption

In the UK employers can take advantage of the annual function exemption, which means no tax or national insurance contributions are payable on costs relating to annual social events organised for employees. 

There’s a limit of £150 per attendee (including non-employee guests) each year and if this limit is breached, the employer must cover the tax and NIC for all of the costs, not just the breach. The exemption considers all end-to-end costs for the event including VAT.

For an event to be eligible for the exemption, it must be open to all employees to attend, or, alternatively, if there are several events (by location or office), all employees should be able to attend one. 

Social distancing restrictions in place mean that a physical event is unlikely for any but the smallest of organisations. Given the current situation, a pragmatic approach suggests that an online meeting would qualify as a location. 

Employers planning a virtual event should consider its organisation carefully. It is possible that employers may need to demonstrate attendance at an online event for it to qualify under the annual function exemption, so will need to ensure that there is a way to collect that data.

Furthermore, a structured social event incorporating the traditional elements of a Christmas party is more likely to be able to meet the requirements for the exemption. For example, if food, drink and entertainment are provided.

Entertainment could include hiring a musician or comedian to play virtually to the whole company at a designated time, for example, or a live Christmas quiz. 

The logistics of ensuring staff can eat, drink and be merry may result in some additional post-party hangovers if not carefully considered. While there is nothing in legislation that says the costs of the event have to be incurred by the employer, it may be the best option. 

The alternative of providing employees with a budget for their meal and have them reclaim it on expenses, may, in an audit situation, prove more difficult to demonstrate as being an annual event as opposed to a series of unrelated events. 

Update 20 November HMRC has confirmed: “Having considered the scope of section 264 ITEPA03 (annual parties exemption), we are pleased to confirm that the exemption will apply to the costs associated with virtual parties in the same way that it would for traditionally held, parties. "Therefore, the cost of providing food, entertainment, equipment and other expenses which may be incurred in hosting a virtual event, will be exempt, subject to the normal conditions of the exemption being met. "It is important to note that the intention of the exemption is to allow for costs of provision which are generally incurred for the purposes of the event itself, and that the event, along with any associated provision, is available to employees generally. ”

Trivial benefits rule

A simpler alternative in the current circumstances may be for employers to provide staff with a gift to enjoy the festivities. 

Under the trivial benefits rule employers can provide a gift up to the value of £50 including VAT without paying tax on the item. To qualify the gift cannot be cash (or a voucher that can be exchanged for cash) and it cannot be in exchange for work or performance. 

Employers could provide a hamper or a voucher for food and drink, for example. In this instance the trivial benefits exemption should apply, but in the absence of the elements of a Christmas party, the annual functions exemption will not be available. 

Have your cake and eat it?

The two exemptions can work alongside each other, so employees can be invited to a Christmas party, allowable under the annual function exemption and also be given £50 of, say, gift vouchers, covered by the trivial benefits exemption.

Lastly, a gentle reminder to keep track of all the minor expenses too. If a business provides a bottle of fizz in a nice gift bag as a Christmas gift, the value of the gift bag should be included in the value of the gift when deciding whether the total value exceeds the trivial benefits limit.

Share your question with HMRC

ICAEW’s Tax Faculty is attending a meeting with HMRC to discuss Christmas parties and other BiK on 29 October which will present the opportunity to highlight areas that need more clarity. If you have a question, please send it to peter.bickley@icaew.com by 28 October.

 HMRC’s guidance 

• Social functions and parties and technical guidance on s264 ITEPA 2003 in EIM21690
• Trivial benefits and technical guidance on s323A ITEPA 2003 in EIM21864