Update: 27 November 2020
HMRC has confirmed that the annual parties exemption will apply to virtual parties, covering costs incurred for the provision of food and drink, entertainment, equipment and other expenses associated with hosting a digital event. This is subject to the normal conditions of the exemption being met.
I think it’s fair to say that 2020 has been pretty challenging. Little wonder then that many seem keen to start Christmas earlier than usual, perhaps to try and eke out the festive cheer for what remains of the year. The traditional, in-person, work’s Christmas parties are unlikely to take place, but a new breed of virtual options look set to provide lockdown-proof and social distancing friendly solutions.
At the risk of doubling up on dreaded C words – what is the tax position for such COVID Christmas dos?
I’m certain that the rules weren’t written for 2020’s circumstances, so a little bit of lateral thinking is required to ascertain how the tax rules should be applied.
Annual party exemption
There is an annual exemption for parties that cost up to £150 per head. This is an “all in” cost including VAT, so food, drinks, travel (arguably not so much of an issue this year!) and entertainment must be included as part of the overall calculation. To meet the criteria for the exemption, the events must be open to all employees. Businesses with multiple locations can, of course, have multiple parties, as long as everyone is invited to one of them. Do bear in mind that the £150 isn’t an allowance –one event costing £149 per head would be fully exempt but one event that is £151 is fully taxable as a benefit in kind. It’s quite acceptable for employees to attend more than one event in a year and for the exemption to apply, as long as the total cost does not exceed £150 per head.
So, what about virtual parties on digital platforms like Zoom, Remo or Teams? In theory, there isn’t anything to stop this type of event from being part of the annual party exemption provided, as I’ve noted above, that everyone is invited. Larger businesses can hold multiple digital events, perhaps divided by department, event theme or activity, as long as each employee gets an invite.
Food and drink options
It’s hard to see an issue if employers arrange for all of their employees to have some form of food and drink for the digital do delivered to them in advance. However, if employers tell their employees to buy their own party sustenance and reimburse it, this is where it starts to get tricky. On the face of it, whilst this is likely to be a better option from a logistical perspective and it may well work, HMRC might challenge it as a legitimate part of party costs when it’s made up of lots of individual employee expense claims. I mean, how do you evidence that this expense was solely related to the party and not simply paying for food and drinks? Perhaps as part of the party, you get everyone to take pictures of their purchases and share?
Don’t overlook the trivial benefits option – this allows employers to gift employees something up to the value of £50 per head. So, hampers, fizz or the traditional Christmas turkey could be sent out to people as a Christmas treat and, provided this is not a reward for services, then it’s tax-free. The gift could be a voucher, so long as it’s not exchangeable for cash.
There have been some helpful tax relaxations due to COVID-19, only in my last blog did I mention that HMRC are more readily accepting home working claims for the time being. However, be aware that HMRC has not specifically indicated that there will be any relaxation of the annual party exemption and it will be a case of whether they adapt the current tax rules to include digital parties under these exceptional circumstances that we find ourselves in.
If you have any tax-related queries, party-related or otherwise, please get in touch with Kate Naylor me by email or call me on 0113 297 6825.