UPDATE: Have yourself a Merry Virtual Christmas….

Fri 20 Nov 2020

Christmas has traditionally been a time of year employers have rewarded and thanked staff for their efforts.  This has traditionally been done tax efficiently by making use of tax exemptions for annual staff events and/or the trivial benefits exemption.

This year, given the Covid-19 pandemic, this tradition of rewarding staff may actually have more importance. Staff will have continued to work through the ongoing Covid-19 pandemic for 9 months by the time Christmas comes and will have found the year particularly challenging in all aspects, leaving many employees anxious about work and the future.

So what can employers do to reward staff and hopefully boost morale and can this be tax efficient?

Given the year we have faced, employers can still provide non cash discretionary benefits up to the £50 limit (including VAT) such as gift vouchers/Christmas hampers. These will typically be tax/NIC free via the trivial benefits exemption. But what about the annual function exemption that is traditionally used for Christmas parties?

Already, many employers have cancelled bookings for Christmas parties at venues, restaurants and other types of locations.  With the latest restrictions placed upon the hospitality sector, it is highly unlikely that traditional Christmas parties will go ahead this year. Given this, and as an alternative, could an employer hold a virtual Christmas party and would the ‘annual function’ tax exemption apply?

The answer to the first part of this question is obviously yes. We have already seen how businesses and their employees have adapted using Teams or Zoom and the same methods could be adopted for the annual staff party. However, could such a staff party be tax exempt and what would this look like?

To answer this we need to look at the legislation (s264 ITEPA 2003) and HMRC’s related guidance concerning annual staff functions. The key points in both are that an event:

• must be annual in nature,
• open to all staff (or all staff at a particular location); and
• must cost no more than £150 per head (including VAT).

Interestingly, neither the legislation nor the guidance stipulates where an event has to be held, what form it must take or whether employees can attend/participate from different locations.

Therefore, on a strict reading of the legislation, it does not appear that holding an event “virtually” is outside the scope of the annual function exemption.  Additionally, following discussions with HMRC this week, we have now received confirmation that:

“The exemption will apply to the costs associated with virtual parties in the same way that it would for traditionally held, parties.

Therefore, 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.”

 Our view

We welcome HMRC’s clarification on this matter. However, we await the published updated guidance on the website and in the December employer and agent bulletins. A key area to manage, control and assess will be whether HMRC could potentially challenge that the virtual event you have held was not actually a qualifying annual function. This may be due to the event being no more than a five minute discussion to say Happy Christmas and then provide hampers to enjoy over the Christmas period – clearly this would need to be considered via the trivial benefits exemption, not the annual function exemption.

However, where there is an organised event, food is provided that is to be enjoyed during the event and HMRC can establish that this was something that meets to the conditions of the exemption, it is not likely that this will be challenged and become taxable.

Next steps

It will be important to take advice to help ensure that your event meets the conditions. Please do contact neil.munro@mazars.co.uk or linda.broomfield@mazars.co.uk for more information and help ensure you remain compliant.