UPDATE: On 20 November, HMRC confirmed that they will accept a virtual Christmas party as an event which is capable of falling within the rules for annual functions. HMRC have supplied us with the following statement:
“Having considered the scope of section 264 ITEPA03 (annual parties exemption), we are pleased to confirm 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. We will be updating our GOV.UK guidance shortly.”
The Association of Taxation Technicians (ATT) is calling for urgent guidance from HMRC to avoid people enduring an unpleasant tax hangover because of their ‘virtual’ Christmas parties this year. The ATT is asking for clarity on whether a ‘virtual party’ – particularly one that includes a party box - will be eligible for the usual tax exemption that applies for annual parties.
Current rules allow employers to spend up to £150 per head (including VAT) towards the costs of an annual function such as a Christmas party without creating a tax liability for their employees and themselves – provided that certain conditions1 are met. As a result of COVID-19, the usual work fuctions will not be possible this year. With employers hurriedly considering alternative ways to express seasonal greetings and boost morale, the risk is that online events and so called ‘virtual parties’ could create unintended tax consequences.
Jeremy Coker, President of the ATT, said:
“It is a pity that HMRC are still on mute about ‘virtual’ Christmas parties.
“Employers looking to arrange some seasonal fun for their staff after all the difficulties created by the pandemic may consider live-streaming events such as quizzes, food tastings, cooking lessons or ‘live’ entertainment to share as a team – potentially with supplies of food, drink and other favours sent in advance to employees’ homes to enjoy during the event.
“There have been suggestions that a ‘virtual party’ is not really a party for tax purposes – even though so many other activities such as conferences and training have been moved online.
“We are also concerned that HMRC will seek to split out the cost of any food, drink or party favours sent to employees’ homes as a party box to accompany the online event, and treat this element as a taxable benefit because some employees could opt out of the event itself.
“We understand that HMRC are considering the matter. We would like HMRC to clearly state that they accept that a ‘virtual’ party falls within the existing rules as an evolution of the meaning of an annual function. This clarification is needed urgently because employers are thinking about what they can do for staff now. Indeed, some may already have taken decisions and booked events and supplies assuming the usual tax reliefs will apply and could get a nasty shock if they find that HMRC think differently.”
ATT TIP: make trivial gifts
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 HMRC do not accept that a ‘virtual party’ falls within the annual function exemption, one approach could be for employers to keep the entire costs of the event within the trivial benefits rules2 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.
Jeremy Coker said:
“Ensuring that the cost of any online event, including any party box, falls within the trivial benefits rules might be a solution for some but it still leaves the tax position uncertain where employers were planning – or perhaps have already booked – an event costing more than £50 per head.”3
The ATT also warns that this is not a solution for those employers who usually provide a gift under the trivial benefit rules already - in addition to a party. Where two gifts are made for the same purpose HMRC will aggregate the costs when applying the £50 trivial benefits limit; so employers who are used to using both reliefs in tandem might be caught out if the tax rules for parties do not operate as expected this year.
Jeremy Coker said:
“What we need is early clarification from HMRC – ideally confirming that the expenditure conditions for annual functions will be regarded as applying to virtual parties in the exceptional circumstance created by the pandemic.”
Notes for editors
1. For a social event for employees to qualify for income tax exemption it must be an annual event (for example a Christmas or summer party) which is open to all staff generally or all staff at a location, if the employer has more than one location. No liability to tax arises provided that the total cost of the event (including travel and accommodation although that is unlikely to be applicable this year) is no more than £150/head. If the employer has more than one annual event in a tax year, for all the events to be tax-free the combined cost per head of all the events must be under £150.
2. More details on the trivial benefits rules are available here.
3. When assessing whether an item falls within the trivial benefits rules all associated costs of the gifts must be factored in, including any VAT and also costs of postage, delivery or courier charges. For events such as cooking demonstrations where fresh food is supplied to the employee in advance, delivery charges could be significant.