The Christmas party tax exemption for employers
As we head into another festive season, many employers are now, more than ever, looking to bring a little bit of cheer to their employees this Christmas.
With restrictions a little more relaxed than this time last year, where regions were split into “Tiers” to determine the severity of lockdown restrictions, many businesses will be looking to arrange a more traditional Christmas party for employees.
Employers can spend up to £150 per staff member on an annual Christmas party without needing to notify the tax authority, due to the rules on expenses and benefits for social functions and parties.
Provided the party or function is an annual event, this will qualify as a tax-free benefit if open to all staff, not just directors, and all events in the year come at a cost of less than £150 per person including VAT. This should cover any related costs such as food, drink, transport, and overnight accommodation.
Virtual parties, including gifts for consumption at the party, also qualify. So, you could provide all employees with a festive hamper containing some food and drink to enjoy while the online function takes place - as long as the total cost per head is within the £150 exemption.
No tax or National Insurance contributions (NICs) are payable on costs up to this amount relating to annual social events for employees, assuming every employee is invited to attend.
Employees need to ensure they avoid making some “common mistakes”, when it comes to budgeting for their Christmas party. For example, the £150 value mentioned above is not an “allowance”. Hence, if the per head cost of the event is above £150, the full value of the event becomes a taxable benefit - and not just the excess amount over the £150 threshold.
there's no expectation or legal obligation for employers to keep records of employees who attend the annual Christmas party, assuming the cost per head does not exceed the £150 cap in 2021/22.
where employers need to cover the tax cost of a Christmas party via PAYE Settlement Agreement (PSA) they can face an effective tax liability (including taxes and NICs) of up to 107% of the core value of the Christmas party.
This can mean that the effective, cumulative cost to the employer of providing a Christmas party can easily in some cases be up to 200% of its headline, initial per head cost.
If the pandemic may still present challenges for an actual party, or maybe small businesses with employees working from home in different parts of the country, some firms may choose to hold a virtual event via Zoom.
The main point to note is that in order to ensure the annual function exemption is available, some kind of register of attendance may be necessary.
Entertainment could be booked for the event, or perhaps there might be a Christmas quiz.
Working alongside this online event qualifying for the annual function exemption could be the delivery of up to £50 worth of vouchers or a hamper which could be covered by the trivial benefits exemption. Both exemptions could be claimed.
Remember, under HMRC’s trivial benefits rule, employers can give members of staff gifts worth up to £50 without being liable for tax.
This cannot be a cash reward and there's no restriction on using this at the same time as the annual party.
The key thing to remember is to keep a proper record of all the costs to ensure the exemption limits are not exceeded.
Previous guidance by HMRC states:
“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 are 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:
“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.”.
“A company holds one annual function in a tax year and does so virtually using IT. All employees are invited and each is provided with a hamper consisting of some food and drink to be enjoyed by the attendees during the party. The total cost per head is £100 which is within the £150 exemption and so the exemption applies.”