Tax Free Virtual Christmas Parties

Despite the unprecedented times that we find ourselves living in, companies can still celebrate Christmas in a tax-free style – even if this means having a virtual Christmas party.

Although there is no specific allowance for a Christmas party, or any other employer-provided social function, HMRC does allow limited tax relief against for the cost incurred for having a ‘annual event’ for employees, providing certain eligibility criteria is met.

An event will qualify for a tax benefit if the following conditions are met:

    1) the total cost must not exceed £150 per head, per year.

    2) the event must be primarily for entertaining staff.

    3) the event must be open to employees generally, or to those at a particular location, if the employer has numerous branches or departments.

The exemption should therefore apply even if the party is held virtually and the employer is paying for meals to be delivered to each and every employee’s residence.

The ‘cost per head’ of an event is the total cost (including VAT) of providing:

a) The event, and

b) Any transport or accommodation incidentally provided for the attendees the event (whether or not they are the employees of the company),

Divided by the total number of people in attendance.

The annual limit of £150 per person must not be exceeded in any circumstances. HMRC might cap such expenditure, but they do not have any limit over the number of such events that take place in a tax year. It is solely upon the employer’s discretion if they wish to utilise this £150 per person limit in a single event or spread the same over multiple events.

Please note that the £150 per person is a limit and not an allowance – If the limit is exceeded by just £1, the whole amount must be reported to HMRC.

The £150 exemption is mirrored for Class 1 NIC purposes, (so that if the limit is not exceeded, no liability arises for the employees), but Class 1B NICs at the current rate of 13.8%, will be payable by the employer on benefits-in-kind which are subject to a PSA.

If there are two parties, for example, where the combined cost of each exceeds £150, the £150 limit is offset against the most expensive one, leaving the other one as a fully taxable benefit.

The cost of staff events is in most cases deductible for tax for any business. However the guidance from HMRC specifically states that entertaining staff is not treated for tax in the same way entertainment expense for clients is. Staff entertainment expenses are shown separately in the financial statements as “Staff Welfare” or some other similar accounting head.

There is no monetary limit on the amount that an employer can spend on an annual function. If a staff party costs more than £150 per head, the cost will still be an allowable deduction, but the employees will have a liability to pay tax and National Insurance Contributions (NICs) arising on the benefit-in-kind.

The employer may agree to settle any tax charge arising on behalf of the employees. This may be done using an HMRC PAYE Settlement Agreement (PSA), which means that the benefits do not need to be taxed under PAYE, or included on the employees’ forms P11D. The employer’s tax liability under the PSA must be paid to HMRC by 19 October following the end of the tax year to which the payment relates.

The full cost of staff parties and/or events will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.

VAT-registered businesses can claim back input VAT on the costs, but this may be restricted where this includes entertaining customers.

The staff Christmas party will probably look quite different this year, but with a tweak here and there to meet with current restrictions; it should still be possible for employers to provide some festive cheer.

For more information, Book a Free Consultation!

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