Virtual Christmas Parties and the Tax Implications
Amongst the many other things that the COVID-19 pandemic has affected is that annual institution, the office Christmas party. Several obstacles stand in the way of holding one this year – social distancing and affordability among them. External venues will not be hosting such events, and trying to organise them in the office itself will be difficult to achieve.
Many organisations, therefore, have followed the trend for remote working and have investigated the possibility of virtual Christmas parties – or online substitutes for them, such as pantomimes, musical performances, food delivery vouchers or a “Christmas party in a box”.
Creative though these solutions may be, they have raised the issue with employers of the tax implications of such substitutes.
In years gone by, employers will have been able to take advantage of the Annual Function Exemption, which means that when spending money on annual social events attended by employees, no tax or national insurance contributions are payable on those sums. This exemption has a limit, of course, which is £150 per employee or non-employee guest. If the employer overshoots that limit, they have to pay the tax and NIC for all the costs, not just the amount by which they exceeded the limit.
Included in the exemption are all end-to-end costs and that includes VAT.
The exemption applies to events that are open to all employees to attend, or – if events are organised by separate offices or locations – all employees should be able to attend one.
So, how does this apply to virtual Christmas parties or other online substitutions? Well, the good news is that HMRC has confirmed that the exemption will apply to the costs associated with virtual parties in the same way that it would for traditionally held parties. "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.”
What should employers do?
It is important to bear in mind that even though the exemption is now deemed to apply to virtual Christmas events, the requirements still need to be fulfilled: employers should therefore ensure that attendance at any virtual event is open to all and document that in case they are required to prove it. The structure of the event will also affect whether the exemption’s requirements are met; a more formal event, where food, drink and entertainment are provided, in whatever shape or form, and which starts at a specific time, will be more likely to be compliant.
Trying to arrange for dozens, if not scores of Christmas dinners to arrive at various locations, which can often be scattered far and wide, may prove somewhat difficult and organisations may think about opting for giving each employee their own budget and leaving the decision about food and drink to them. However, this could cause problems – it may prove difficult to show that the party was a single annual event as opposed to a series of individual and unrelated events for the purposes of the regulations.
Some companies, confronted with the logistical problems of arranging and delivering dozens of meals and drinks may, instead, decide to opt for gifts. Under the Trivial Benefits rule, employers can provide employees with gifts, the limit being a value of £50 including VAT. The gift must not be cash, or a voucher that the employee can exchange for cash, and it cannot be in recognition of particular services performed by the employee as part of their employment duties or an entitlement to the benefit as part of any contractual obligation.
Therefore, if the employee wanted to send each employee a gift such as a hamper or food/drink voucher, then provided the value limit was not exceeded, this would come under the Trivial Benefits rule.
It is entirely possible to operate both exemptions at the same time. An employee can attend a virtual Christmas party, which would be permissible under the Annual Function Exemption and, in addition, be sent a gift of up to £50, which would fall under the Trivial Benefits exemption.
A caveat for employers who are putting such initiatives into place – HMRC is well-known for springing surprises on businesses several years down the line, so it would be a good idea to keep all the receipts and document the expenses – no matter how minor, as they may be needed in future should enquiries be made.
Caroline Lamyman, Tax Advisor at rradar