HMRC confirms virtual Christmas party exemption
Samantha Mann considers how the tax system will support the seasonal festivities for 2020, including the news that virtual Christmas parties will be eligible for the annual function exemption.
2020 is a year when an employer’s ability to say thank you to their employees has never been more important. But the Covid-19 lockdown restrictions have put a stop to the annual office party and have forced employers to think of alternative ways to wish employees a happy Christmas and to boost morale.
Section 264 of ITEPA 2003 allows an exemption where an employer hosts an annual event. This doesn’t have to be at Christmas, it could be held at any time of the year, the key here is that it is an annual event and is made available to all employees, or all in a particular location where an employer has more than one location, at a cost of less than £150 per head.
All costs of providing the event must be counted when calculating the ‘per head’ cost. This could include:
- Food and drink
- Transport and accommodation that enables an employee to attend
This list isn’t exclusive, and in arriving at the ‘cost per head’ the total expenses should be divided by the number attending, which may also include non-employees.
The £150 is not an annual allowance, if the cost is exceeded then the whole amount will become taxable.
This year, all face to face meetings and events have been replaced by virtual meetings and events, and we have seen huge levels of creativity to achieve successful delivery. HMRC has now confirmed, in response to stakeholder lobbying, that where all normal conditions are met, virtual events can be included when considering the £150 exemption.
A company holds one annual function in a tax year and does so virtually using IT. All employees are invited and each is provided with a hamper consisting of some food and drink to be enjoyed by the attendees during the party. The total cost per head is £100 which is within the £150 exemption and so the exemption applies.
This will come as great news for the 49% of employers who, in a recent CIPP poll, confirmed that they fund the full amount incurred for hosting the annual Christmas party.
Since April 2016, as part of a package of simplification measures, a new definition of what would constitute as a trivial benefit was added to ITEPA 2003. Prior to this time guidance existed that was open to misinterpretation and challenge.
The statutory exemption lays out certain criteria that must be met in order to be counted as a trivial benefit which ensure that:
- The benefit is not cash or a cash voucher
- The cost to provide does not exceed £50
- The benefit is not provided as a contractual entitlement
- The benefit is not provided in return for a normal service (or services) expected by the employee – eg hitting a pre-set performance target
Common examples seen include a gift of flowers on a birthday, a turkey at Christmas, or a modest layette on the birth of a child. More than one trivial benefit can be provided during the year; however, where the employer is a close company and the trivial benefits are given to a director, office holder or members of their families or households, an annual limit of £300 exists.
When all else fails
Otherwise referred to as a Christmas bonus, arguably a cash gift could present the employer with the most simple solution for saying thank you to their employees and spreading a little cheer during the festive season. Even a modest cash bonus can bring out the child in us (who didn’t love a £5 note from a favourite Aunt or Uncle tucked in to our birthday or Christmas cards)?
A gift such as this, and for whatever reason it is given, will be subject to PAYE income tax and Class 1 NICs but the amount that the employee receives in their pay will depend upon their individual circumstances. For employees with pay that doesn’t exceed the primary threshold they may not suffer NIC impact and if their taxable income for the year falls below their personal allowance the individual could receive the full gross amount – whereas a higher rate tax payer could receive considerably less - one of the key features of a progressive tax system.
How do we normally celebrate during the festive season?
Our straw poll findings also revealed that generosity of spirit is alive and well amongst most employers, who provide gift vouchers (4%), turkeys (1%), chocolates/biscuits (4%), a cash bonus (4%), an annual party (35%) and even some (1%) employers showering unlimited generosity (budget allowing).There remained a stubborn tendency towards Scrooge-like behaviour, with 46% of respondents admitting to being provided with nothing from their employers at Christmas. Bah Humbug!