Planning a virtual Christmas party this year?
Annual function exemption
The annual Christmas party is typically covered by the annual function exemption, meaning that the cost of providing an annual social function for employees will not be subject to tax and national insurance if it meets certain conditions.
HMRC have confirmed that the exemption will also apply to virtual parties in the same way as it would for traditional parties.
What are the conditions?
The event must cost no more than £150 per attendee, including VAT. “Per attendee” includes non-employee guests, for example if you invite the partners of your employees. If this limit is breached then the employer has to pay tax and national insurance on ALL costs, not just the amount over £150.
The event must be open to ALL employees to attend or if there are several events, perhaps one for each office/location, then all employees should be able to attend one. If there is a separate party just for directors then this is not open to all employees and would NOT qualify for the exemption.
The event must be ‘annual’, meaning a typical Christmas party or, in normal circumstances, a summer BBQ would qualify.
What if we offer more than one event?
If you offer both a Christmas party and a summer BBQ to your staff then you need to look at the combined value. If both have a value of £60 per head, then the total cost is £120 which is below the £150 limit. This would fall within the exemption.
If they both have a value of £80 per head, in total this is £160 and the 2nd event would therefore not fall within the exemption.
HMRC offer some examples here:
https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21691
Virtual parties – Christmas 2020
Of course in 2020 Christmas parties will be a little different to normal.
Some employers are offering virtual parties over Zoom, some organising a quiz, others paying for a magician to entertain staff, all whilst providing a hamper of food and drink for staff to recreate a ‘party’ at home.
HMRC are clearly more in the festive spirit that Ebenezer Scrooge and have 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. ”
In short, this means that virtual events qualify for the exemption too and HMRC have even added example 3 to cover virtual parties:
“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.”
The trivial benefits rule
Some employers may wish to give your staff a Christmas gift as well as a celebration.
The annual function exemption and the trivial benefits rule can work hand in hand. Employees could be invited to a Christmas party, allowable under the annual function exemption and also be given a gift up to the value of £50 covered by the trivial benefits function.
We’ve published more detail about the trivial benefit rules here.
