Virtual Christmas Party Tax Implications

Planning a virtual Christmas party? Organisations wanting to provide boost morale among their staff this season need to look at some important tax considerations, according to the Institute of Chartered Accountants in England and Wales (ICAEW).

Thanks to Coronavirus, traditional office parties will not be an option for most businesses, but organisations still wanting to give a bit of Christmas cheer after a difficult year will be considering how they can do things differently.

Whether it is hosting a virtual Christmas party, or offering other treats such as online cookery classes, virtual pantomimes and streaming live music performances, how do these work with tax exemptions for employers?

Virtual Christmas Party - glass of wine and computer

Annual function exemption

Employers in the UK 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 staff. 

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 virtual Christmas party 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. 

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.

Get in touch if you need any advice about your company events.

This article first appeared on the ICAEW website.

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