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A COVID Christmas?

HMRC have released a statement confirming that the tax treatment of virtual parties will fall within the benefits code for staff parties if all the other criteria are met.

Although we may not be in a full lockdown come Christmas, there is a realistic possibility that this years Christmas party will be like no other!

TaxAntics are pleased to provide their summary of key points below. For employers needing further analysis of how the pandemic is effecting them, please do contact us by using the contact form or emailing advice@TaxAntics.co.uk.  

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Staff Parties

The starting point is that provided the event meets certain criteria, staff Christmas functions are free of tax and National Insurance Contribution (NIC) implications.

The party must be open to all employees. The cost to the employer must not exceed £150 per head including any attending who are not employees, such as where plus ones are allowed. The £150 limit includes VAT, transport, and overnight accommodation.  

The £150 per head exemption can apply across separate locations and departments if it is not practical to hold one single function. For businesses with more than one office, an annual event that is open to all employees based at one location still counts as exempt. Employers can also put on separate parties for different departments, provided all employees can attend one of them.

If the cost goes over £150 per head, then the whole amount and not just the excess is taxable. Having too much of a good time may prove costly so an open bar is probably best avoided.

If the event is taxable, it would then have to be reported on the employee’s P11D. This would probably lead to a very disgruntled employee. The employer could choose to pay the grossed up income tax and NIC under a PAYE Settlement Agreement (PSA).

If the cost exceeds £150 per head, employers could ask the employees to make a small contribution to bring the cost to below the limit.

Where the cost is less than £150 per head, the unused element could be spent on another staff function as long as the annual aggregate spend does not exceed the £150 per head limit. Where the limit is exceeded, the employer can elect the lowest costing event as the taxable one.

HMRC have stated:

"Annual parties or events for employees are exempt from tax where the cost does not exceed £150 per head. Festive events for staff will be different during the pandemic, so we're confirming today that this exemption will also apply to the costs associated with virtual parties - including gifts for consumption at the party."

HMRC also updated its official guidance at:

EIM21690 - Employment Income Manual - HMRC internal manual - GOV.UK (www.gov.uk)  

"Where an annual function is provided virtually using IT then the exemption is capable of being met provided all other conditions are also satisfied as the exemption applies to allow for costs of provision which are generally incurred for the purposes of the event itself."

Trivial Benefits

To avoid covid related issues or to save costs and the administrative burden, employers may choose to provide staff with vouchers for food and drink or even a hamper this year.

Such gifts could be covered by the trivial benefits rules although would not be covered by the employee function rules. It is important to remember that cash gifts and vouchers are still taxable as earnings.

A trivial benefit is broadly a non-contractual payment costing £50 or less including VAT per employee and is in no way connected to services performed. An average base on the total cost can be used where it is difficult to define the cost per employee.

If the cost is over £50 per employee, then the whole benefit, not just the excess, is subject to income tax and Class 1A National Insurance.

Trivial benefits are capped at a total of £300 per tax year for directors, office holders and their families.

Trivial benefits can provide more scope for employers to provide Christmas gifts and parties, although with no legislative provision to increase the £50 cap for inflation, the amount itself may become trivial over time.

Both the Christmas party and trivial benefit exemptions could potentially be claimed in scenarios like where an online event qualifying for the annual function exemption is accompanied with up to £50 worth of vouchers or a hamper.

Employers should keep a proper record of all the costs to ensure exemption limits are not exceeded.

For employers needing further analysis of how the pandemic is effecting them, please do contact us by using the contact form or emailing advice@TaxAntics.co.uk.  

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Published: 27th November 2020