Tax Talk: Has Christmas been cancelled?

Other ways of thanking your teams

read timeRead time: 4 mins
It’s the season when employers would normally be planning the work Christmas do. But in this bizarre year, they may have to find new ways to thank their people.

As 2020 starts to draw to a close and everyday life continues to be disrupted by the coronavirus pandemic, you would be forgiven for thinking that Christmas this year had been cancelled. Whilst the situation is not quite that extreme, for most the traditional employee Christmas party will be a casualty of the crisis.

For many employees, the annual Christmas bash – whether it’s a big, all-company black tie affair or simply a team meal – is a highlight of the workplace’s social calendar. For employers, it’s an opportunity to say thank you to staff for their contributions throughout the year and embed a sense of togetherness across the company.

Providing certain conditions are met, the cost of putting on a Christmas, or other annual, party is usually exempt from income tax and NICs.

With the current restrictions on social gatherings making any form of Christmas function almost impossible, many employers are considering what tax efficient alternatives they can offer employees in order to express their festive goodwill.

If these were normal times

The costs of providing annual functions for employees are usually exempt from income tax and NICs, so long as all employees (or all employees in a specific office or team location) are invited and where the total cost per person attending is less than £150 (inclusive of VAT).

Companies can organise more than one event for employees provided that both occasions are annual in nature (for example, a summer barbeque and a Christmas party), open to all employees, and the combined costs do not exceed £150 per attendee (inclusive of VAT) per tax year. 

If the combined costs of all annual events do exceed £150, then employers can choose to which event or events the exemption will apply. But the £150 per tax year figure is not an allowance which can be offset against the total costs of all events per employee. It’s an exemption for the costs of an event itself, so the costs of that event are either taxable or not taxable on a per employee basis. For example, if a company organised a summer barbeque for it’s staff at a cost of £45 per head and a Christmas party costing £125 per head in the same tax year, then the exemption could apply to the cost of the Christmas party but the full cost of the summer barbeque would be treated as a taxable benefit.

What are the alternatives to a party?

The option of just paying employees a cash amount would not be tax efficient and is unlikely to be in line with the reward policy of most companies  so is not a realistic alternative for most.

The  obvious (and realistic) alternative is to delay the 2020 Christmas party and hold it once the country has Covid-19 under control and life starts to have some semblance of normality. 

But beware. There’s no guarantee of when such a function could be rescheduled, so it may also risk exceeding the £150 limit if it is held in the same tax year as another annual event.

HMRC has given no indication that there will be any relaxation in the annual function exemption.

Seasonal and tax efficient

So what other exemptions are available which might help employers? Employers can give low value ‘gifts’ to employees without incurring tax or NICs if they qualify as ‘trivial benefits’. The trivial benefit exemption applies when the benefit does not exceed £50 (inclusive of VAT) in value, is not cash or a voucher which can be exchanged for cash, and is not provided under the terms of a contract with the employee nor as a reward or in recognition of the duties the employee performs in their employment.

Employers may therefore provide staff with hampers, bottles of wine, shop vouchers (so long as they cannot be redeemed for cash) or any other gift up to the value of £50 as a Christmas gesture – and the trivial benefit exemption should apply.

It’s true that £50 is a lower value than the £150-worth of hospitality an employee might have enjoyed at a Christmas party. But, for many, receiving something in these difficult times will be better than nothing at all. And it will allow employers to make a festive gesture when many aren’t able to do so in person because of home-working arrangements.

If you have any questions, please get in touch.

Article written by Daniel Kelly in our London office.