During the pandemic having a Christmas party may be more important than ever for employee morale. But how can you have a Christmas party this year if you can’t celebrate in person at the same venue!? And how can you do it tax efficiently?
Traditional office parties or an evening in the pub are unlikely to be an option. So will you hold a virtual Christmas party this year? There are a wide range of potential alternatives such as online cookery classes, virtual pantomimes or a DIY Christmas party kit in the post!
How do these options work with tax exemptions for employers?
1. Annual function exemption:
In the UK employers can take advantage of the annual function exemption. This 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. If this limit is breached, the employer must cover the tax and NIC for all of the costs, not just the excess. The exemption considers all costs for the event and includes VAT.
For an event to be eligible for the exemption, it must be open to all employees to attend. 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.
What else should you consider?
Be prepared to demonstrate employee attendance at your online event for it to qualify under the annual function exemption. Make sure there is a way to collect that data.
A formal 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, food, drink and entertainment could be provided. Entertainment could include hosting a live Christmas quiz or hiring a comedian to play virtually to the whole company at the same time.
2. Trivial benefits rule
An easier alternative to a party is for employers to provide staff with a gift to enjoy the holiday season instead.
Under the trivial benefits rule employers can provide a gift up worth up to of £50 including VAT without paying tax on the item. The gift may not 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 voucher for food and drink. In this instance the trivial benefits exemption should apply. In the absence of the elements of a Christmas party, the annual functions exemption will not be available.
3. Can you use both exemptions?!
Yes! An employer may use both exemptions. Employees can be invited to a Christmas party using the annual function exemption and also be given £50 of gift vouchers or a bottle of champagne . (Note that if you use a gift bag, then the value of the gift bag should be included in the value of the gift which must be under £50).
If you have any questions, please get in touch... And we love Christmas parties at North Star Accounting, so please share your photos with us on Facebook @NorthStarAccountingAndTax