Office Christmas parties cancelled once again?

Office Christmas parties cancelled once again?

As Christmas fast approaches and another turbulent year draws to a close, employers may be seeking to boost morale and celebrate what we hope will be a near ‘normal’ Christmas with their employees. However, with the arrival of recent announcements from Downing Street, encouraging businesses to postpone any planned parties, nothing is ever as simple as it seems.

What does this mean for our office Christmas parties from a tax perspective?

The annual function exemption

For employers still hoping to host face-to-face Christmas parties, they may qualify for annual function exemption. An annual function exemption is available for staff social events, meaning no charge to tax or National Insurance Contribution (NIC) will arise. In order to qualify for exemptions, the cost per attendee must not exceed £150 or the exemption falls away entirely. The costs should include any travel and hotel expenses incurred to enable the employees to attend the event, and the VAT.

The event must be open to all employees, or all employees at a particular location, and can be applied to more than one event - for example, a summer barbeque and Christmas party.  If the cumulative value of both events is greater than £150, then the exemption falls away with at least one of the events being liable to tax and NICs, generally the least expensive one.

What about virtual events?

2020 saw the emergence of virtual events. Some employers may choose to opt for this method of hosting a Christmas party once again this year, especially when taking into account the recent Government announcements.

When hosting virtual events, food and drink can be provided for employees, but crucially there must be an event, albeit in the virtual world. Simply providing a hamper of food and drink items does not qualify as an annual function.

What are the tax implications for postponing your Christmas party?

With many employers making the decision to cancel festive celebrations, it’s worth mentioning that the annual function can be utilised at any point in the tax year - as long as it used to mark an annually recurring event. Having a Spring ball rather than a Christmas party could therefore still utilise the exemption. However, employers should be wary. If they were to roll over the celebrations until after 6 April 2022, they could find themselves having two annual functions in the same tax year which may exceed the £150 exemption.

Trivial benefit exemption – an alternative to Christmas parties

For employers wishing to provide a gift to their employees, they may qualify for trivial benefit exemption. Given from employers to their employees, trivial benefits can be best described as “small tokens”. Some examples include gifting wine or chocolates, or providing beer or pizza for the office.

To qualify for this particular exemption, employers can provide a gift costing up to £50, however the gift cannot be given in cash or a cash voucher (which can be exchanged for cash), nor should it be to incentivise, recognise or reward performance. The employee must also not have a contractual entitlement to receive it.

Careful planning is required

It is possible to make use of both the exemptions mentioned above at Christmas time, but they cannot be merged. Careful planning and separate records of these benefits is essential.

If you have any questions regarding Christmas parties and the tax implications of providing gifts to employees, or would like to discuss any of the areas mentioned in further detail, please get in touch with your usual Azets contact or a member of our Employment Tax team.