For a long time, it’s been possible for employers to treat their employees to a Christmas party or other annual function (e.g. Summer BBQ), without the employee being subject to tax on the value of the benefit.
Given COVID, holding a Christmas party at a pub, restaurant or hotel this year isn’t an option.
But a little bit of good news for a change: HMRC have recently confirmed that virtual parties can still fall within the annual party tax exemption.
For more information, read on ……
The general rules
A staff party or annual function (e.g. Summer BBQ) qualifies as a tax-free benefit for your employees.
As usual, HMRC sets conditions. Provided you comply with these conditions, your employees receive a tax-free benefit and your business can claim tax relief for the cost of the party as a business expense.
The key conditions are shown below:
- It should be a recurring annual event, not just a one-off.
- The total cost of all events must not exceed £150 per head, per year.
- £150 includes VAT, together with any extra costs such as transport and accommodation.
- Be careful, the £150 is a limit and not an allowance. So if the cost per head per year is £151, the whole benefit is taxable on employees requiring the preparation of P11Ds. Something to be avoided.
- The event must be open to all employees.
- A director of a limited company employer is regarded as an employee, so qualifies for the exemption. Sole traders and partners in partnerships are self-employed (i.e. not employees), so they don’t qualify for the exemption, but their employed staff do.
- The event must not just be for directors, unless all employees are directors.
- Provided the £150 limit is not exceeded, there can be any number of parties, for instance 3 parties at a cost of £50 each, at various times of the year.
- Other guests (e.g. partners of employees) may be invited too. But the primary purpose of the event must be to entertain all your employees.
If you comply with the conditions:
- The cost of the whole event is an allowable expense for your business; and
- If you’re VAT registered, you can claim back input VAT. But this may be restricted where you also invite customers.
Take care to keep records of the cost of such parties and how you’ve calculated the cost per head of all events. If you fail to take reasonable care and this leads to a loss of tax payable to HMRC, tax penalties will apply.
Virtual staff parties – a little bit of good news for a change!
Virtual parties cannot have all employees in a single location so would ordinarily fail to qualify for the annual function exemption.
But HMRC has updated their guidance to include virtual annual functions within the exemption, provided that all of the other conditions above are met.
A virtual party is defined as an annual function provided virtually using IT.
An example might be:
- A business holds its annual Christmas party virtually using IT (e.g. Zoom, MS Teams).
- All employees are invited.
- A hamper of food and drink is provided to each employee to enjoy during the party.
- The total cost is £100 per head.
The cost is less than the £150 per head maximum and so the party is tax-exempt.
While arranging a virtual Christmas party might take a bit of imagination and effort, it will no doubt bring a little to cheer to your staff. And if you order the food and drink locally (for example, a local pub/restaurant etc. which can only offer take-away in Tier 3 areas), you’ll be helping those businesses which have been most impacted by this miserable virus.
Something to think about – saying thanks to your staff and helping local businesses get through to the other side.
If this exemption is of interest, you should discuss your plans with a firm of chartered accountants to ensure that you’ll comply with HMRC rules and therefore qualify for the tax-free benefits.
Trivial benefits exemption
This annual function exemption should not be confused with the Trivial Benefits Exemption. The latter is another tax-free ‘perk’ for employees.
You can, therefore, take advantage of both these exemptions. But again take care when doing so, to ensure you meet HMRC’s conditions.
If you need help on this or any accountancy, tax and SME business issues, get in touch for a no-obligation discussion – see our Contact Us page for how to reach us.
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Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Whyatt Accountancy and the writer accept no responsibility for any loss arising from any action taken or not taken by anyone using this material.