Employer plans for the festive celebrations

As we approach another festive season, and with some employees having returned to the office to work at least for some of their time, some employers may have considered a return to the traditional annual Christmas party to reward employee for a difficult year. 

However, with transport difficulties and an increase in remote working, others may be considering a virtual event.

This insight explains what the options might be for festive parties, and what the potential tax implications are of those alternatives.

The usual rules

To those employers keen to plan a festive party in line with what they would have done in pre-pandemic times, the normal ‘annual function’ rules should be considered.

Generally, the usual 'annual function' exemption will only apply if all employees (or all employees in one office/ team location) are invited and the VAT inclusive cost per head is less than £150.

This might mean that the many employees who are understandably cautious about attending large events may miss out. While this would not impact the exemption (as they would be invited), employers may be looking for alternative ways to celebrate with these employees.

Implications of not holding a festive party

It is understandable, during the current circumstances, if employers decide not to hold a large office party this year. These employers may be worried about not holding a festive party due to the consequences it might have on the exemption in the following years, something that HMRC have looked at in the past.

The exemption applies to 'an annual party or similar annual function'. In the past, some HMRC officers have taken this phrase literally and concluded that if the party or function is not held in a particular year, then the exemption will be lost in future years and even invalidates previous year exemptions.

The good news is that this isn’t correct. The above phrase is intended to mean parties or functions that are of an annual nature, such as a summer BBQ or festive party. In other words, something that could occur every year. Therefore, a decision not to hold a festive party in 2020 or 2021 will not have any impact on the ability to apply the exemption in future (or previous) years.

Virtual festive parties

For some, working from home has become the norm. This might mean that a physical party might not be appropriate. Instead, an option of a virtual festive celebration might be something that employers could arrange.

HMRC have confirmed that where an annual function is provided virtually using conferencing technology, then the exemption is capable of being met provided all other conditions are also satisfied. The exemption would apply to the costs which are generally incurred for the purposes of the event itself.

We understand that costs such as food, drink, entertainment or other expenses associated with hosting a virtual event would qualify if they would have qualified under normal circumstances at an in-person event. The exemption is measured against the total cost (per head), so extra spend on the delivery of food, drink or other items to be consumed by employees during the event would also need to be considered.

What can employers give to employees instead?

• the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements)
• the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services).

Clearly the £50 limit per employee is a lot lower than the £150 per head limit for a festive party, but it’s better than nothing. The types of things that could fall under this exemption would be a gift or gift vouchers (that are not exchangeable for cash) that the employee could spend in supermarkets or other shops.

Another example of such a benefit that would qualify for the exemption would be a food and drink hamper to be consumed during the event, which is sent out to each employee in advance of the event taking place.

This type of benefit would be exempt from income tax, and still allow employers and employees to enjoy the festive season.

If you have any queries related to the annual function exemption, trivial benefits function, or any other Employment Tax matter, please contact your usual Crowe contact.