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01 December 2020

Virtual Christmas parties – beware of tax!

Tax Tips – Business Question:

My staff have worked incredibly hard over the last 8 months and they have went above and beyond the call of duty to help keep my business operating during the pandemic. I would like to recognise their contribution and we normally have a very enjoyable Christmas staff night out. This isn’t possible this year and I was thinking about having a virtual Christmas party with streaming live music, quizzes and raffles. Can you explain the tax implications of running a virtual party?

‘Christmas is almost upon us and the 2020 festive season will be unlike any other. As you note, traditional office parties may not be an option, but your business is still wanting to boost morale and thank staff after a difficult year,’ says Malachy McLernon

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There are numerous ways of doing this – from online cookery classes, virtual pantomimes and streaming live music performances, to food delivery vouchers and a DIY Christmas party kit in the post, there are a wide range of potential options, but how do these work with tax exemptions for employers?

In the UK businesses can take advantage of the annual function exemption, which means no tax or national insurance contributions are payable on costs relating to annual social events organised for employees.

There’s a limit of £150 per attendee (including non-employee guests) each year and if this limit is breached, the employer must cover the tax and NIC for all of the costs, not just the breach. The exemption considers all end-to-end costs for the event including VAT.

For an event to be eligible for the exemption, it must be open to all employees to attend, or, alternatively, if there are several events (by location or office), all employees should be able to attend one.

Employers planning a virtual event should consider its organisation carefully. It is possible that employers may need to demonstrate attendance at an online event for it to qualify under the annual function exemption, so will need to ensure that there is a way to collect that data.

Furthermore, a structured social event incorporating the traditional elements of a Christmas party is more likely to be able to meet the requirements for the exemption. For example, if food, drink and entertainment are provided.

Entertainment could include hiring a musician or comedian to play virtually to the whole company at a designated time, for example, or a live Christmas quiz. The logistics of ensuring staff can eat, drink and be merry may result in some additional post-party hangovers if not carefully considered.

In addition to the exemption for an annual function, employers can also take advantage of the trivial benefits rules to make seasonal gifts to staff such as a bottle of wine or a Christmas pudding. If a virtual party is not for your business, an alternative approach could be for employers to keep the entire costs of the event within the trivial benefits rules instead. Under the trivial benefits rules, employers can provide benefits costing up to £50 to an employee without tax consequences – provided that these benefits are intended as genuine gifts and not intended as a reward for their work. Therefore, ensuring that the cost of any online event, including any party box, falls within the trivial benefits rules might be a solution for many.

Under the trivial benefits rule employers can provide a gift up to the value of £50 including VAT without paying tax on the item. To qualify the gift cannot be cash (or a voucher that can be exchanged for cash) and it cannot be in exchange for work or performance.

Employers could provide a hamper or a voucher for food and drink, for example. In this instance the trivial benefits exemption should apply, but in the absence of the elements of a Christmas party, the annual functions exemption will not be available.

The two exemptions can work alongside each other, so employees can be invited to a Christmas party, allowable under the annual function exemption and also be given £50 of, say, gift vouchers, covered by the trivial benefits exemption.

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

Contact Malachy

Malachy McLernon / Director

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