Policy and research technical lead The Chartered Institute of Payroll Professionals
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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.

23rd Nov 2020
Policy and research technical lead The Chartered Institute of Payroll Professionals
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Video chatting online on the occasion of Christmas celebration
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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.   

Christmas parties

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:

  • Entertainment
  • Food and drink
  • Transport and accommodation that enables an employee to attend
  • VAT

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This year, all face to face meetings and events have been replaced by virtual meetings and events, and we have seen huge levels of creativity to achieve successful delivery.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.

Employment Income Manual (EIM) 21690 has been updated to take account of this news and a simple example has been added to EIM21691:

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.

Trivial benefits

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!

Replies (7)

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By memyself-eye
23rd Nov 2020 17:47

Virtual 'party'?
Can't wait to consume my £100 hamper during the virtual party!
Of course I won't log out during the festivities, lest my boss (me) finds out I'm not 100% dedicated to the bachanalia going on in the twitter sphere (whatever that is).
Never has the 'Esc' button of the computer seemed so appropriate. I might press it now just to check.....
Now, where's the Fortnum and Mason price list
(yes I know they don't start at £100)

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By Mr J Andrews
25th Nov 2020 09:40

Yes. Example 3 of EIM 21691 does encourage gluttony.

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Replying to Mr J Andrews:
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By Simpleton2
25th Nov 2020 11:00

It doesn't appear to specify consumption, only enjoyment. Perhaps taking a sniff of some brandy and just a small taste of the Christmas cake would suffice. Maybe even just appreciation of how pleasantly the hamper had been presented?

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Replying to Mr J Andrews:
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By Comptable
25th Nov 2020 12:43

The example of £100 is only an example - other example could be available - it could be £10; or it could be £150.

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By deanedwardphillips
25th Nov 2020 09:42

Re Trivial benefits - I've always interpreted the £50 as an annual limit per person but this article seems to suggest multiple gifts throughout the year of less than £50 each. Am I reading that incorrectly?

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Replying to deanedwardphillips:
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By Simpleton2
25th Nov 2020 10:50

The limit is per gift, not per year.

But there are some interesting examples where giving the same gift multiple times, would be considered a single high value gift.
https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

Other matters to watch out for is that it is not part of a contractual agreement, including the staff handbook. So if you give a birthday present to everyone, don't put this in the handbook.
https://www.accountingweb.co.uk/tax/hmrc-policy/crackdown-on-trivial-ben...

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By moneymanager
25th Nov 2020 21:16

Terrific, where can I find £150?

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