A lot of clients would normally be asking for advice right now to make sure that they throw a great party without ending up with a tax hangover. Everyone is having to be a little more imaginative this year, but it is important to know that, whilst the way we celebrate might have to change, the tax rules won’t.
‘Twas the month before Christmas and thoughts were turning to the annual function exemption, a set of tax rules that define how to hold a party without lumbering your employees with a tax and National Insurance bill. This doesn’t tend to fill them with Yuletide joy and feelings of goodwill towards their employer.
Back to basics….
You can spend £150 per attendee, and that means £150 per guest rather than per employee. So, if an employee brings a friend, that’s £300 for them both. BUT, be very careful because the £150 per person must include VAT (yep), and ALL the costs incurred. The kind of thing that we have seen cause problems in the past are extras like transport, and even thoughtful gifts like chocolates, crackers and party games. All of those costs have to be factored in to the threshold. AND if you go over the £150, it is not just the excess that ends up chargeable to income tax and National Insurance, it is the whole amount. Pretty brutal.
You must also make sure that the celebration is open to all employees, although bigger businesses can run separate events if they have teams in different locations. What you can’t do is invite only the management team, and directors can’t throw themselves a boozy bash and claim it’s an exempt occasion under the annual event rules.
In the new Zoom world we live in, it is felt that an online meeting would count as a location. It is probably harder to keep track for a remote event but, to make sure that you can prove that you have complied with HMRC rules, you should absolutely keep good records (as always) of your costs and attendees. You will also need to show that the nature of the occasion was in line with what you would normally expect from an “annual event”. Namely it takes place once a year, and it has the hallmarks of a party: food, drink and entertainment.
It is not easy to see how to provide food and drink for people scattered across a number of physical locations, even if they are in one cyber space. It has been suggested that getting everyone to pay for their own food and stick it on their expenses is not indicative of one single bash but a number of separate shindigs. I would like to think that HMRC might take a more pragmatic approach, but as we are living in “unprecedented times”, it is not possible to predict how they would treat this. HMRC have a few other things on their minds right now so I think they can be forgiven on this occasion for not having published their thoughts on the matter.
What kind of entertainment might you be thinking of? I have heard of companies hiring a band or comedian to perform virtually, or there are businesses who run activities like online escape rooms and quizzes. Just make sure that you split the costs across everyone enjoying the fun.
To side-step the whole food and drink issue, you could make use of the trivial benefits rule which allows an employer to give an employee a gift with a value of up to £50 (again including VAT). It can’t be cash or a voucher that can be exchanged for cash, but vouchers from retailers like Amazon have always been popular. If the idea is that the employee buys food and drink to enjoy at the party, the grocers or restaurant chains might be just the ticket. Alternatively an employer can send an actual food hamper. I feel that I should get a plug in at this point for our independent retailers. In the past, they may not have had the systems in place to offer vouchers but a lot of them have taken the plunge due to the impact of COVID-19. I know that we have clients who have done just this and it might mean the difference between this being their last Christmas in business and them making it to 2021. If you are local to us, this is a good place to start: https://www.visithorsham.co.uk/sector/shopping
The other important part of trivial benefits is that this can’t be given as a reward for working hard or replace salary – it must be a genuine gift. There are limits as well to the number of gifts that an employer can provide in the course of a year. For directors, there is a £300 annual limit. There is no specific limit for non-directors but bear in mind that HMRC are not likely to find it normal to give an employee regular gifts – birthday presents or flowers to mark a special occasion are fine but a monthly £50 voucher looks like wages – if it walks like a duck and quacks like a duck….
Importantly, you can use both the annual event and trivial benefits exemptions together – they are not mutually exclusive.