As much as we’re all looking forward to celebrating at the end of a difficult year, Christmas in 2020 is unlikely to be the same as usual – and for most businesses, the end-of-year office party is off the cards.
That doesn’t mean there’s no way to reward your staff and celebrate their hard work, though.
In a survey by telephone answering service Moneypenny, 26% of office workers said their employer had already organised a virtual Christmas party at the end of October, while 23% were planning to take part in a long-distance Secret Santa.
Whether you’re hosting festive drinks via Zoom, a themed quiz, or an online competition, there are various options for employers looking to end the year on a positive note.
And while you might not be able to get together in person, the same tax break for annual functions that you might usually apply to your Christmas party can also be used for online events.
The annual function exemption
This exemption applies to events that cost up to £150 per person, including VAT.
It’s important to remember that this is not an allowance, so if the cost of your party exceeds it – let’s say you spend £160 per person instead – you’ll need to pay tax on the whole event, not just the £10 per person that exceeded the limit.
To qualify, your celebration must be available for all employees to attend, not just a select few.
For businesses based in more than one location, multiple events can be held where each employee can attend at least one – although, as most events are likely to be hosted online this year, the location of your employees might not be as relevant as it usually is.
You can invite employees’ spouses or civil partners to the party and still claim the exemption. You can also invite customers of the business along, but if the number of customers exceeds the number of employees it may be considered a business expense and not qualify for the tax break.
The other qualifying condition for this exemption is that your party must also be an annual celebration, and not a one-off event. Christmas parties generally qualify, but a yearly summer barbecue could count too.
Guidance from the ICAEW suggests that for virtual events, a “structured social event incorporating the traditional elements of a Christmas party” would be the most likely to meet the requirements for the exemption, such as one that includes food, drink and entertainment provided by the business.
This guidance also notes the importance of record-keeping, saying that employers “may need to demonstrate attendance at an online event for it to qualify under the annual function exemption”.
Compared to events that require formal bookings, such as sit-down meals, it can be harder to keep track of attendance for virtual events. Make sure you have a system in place to collect the relevant data on your event.
Hosting more than one event
You can claim the exemption on multiple events, as long as their combined cost doesn’t exceed the limit per person.
For example, if you managed to fit in a summer party this year and spent £50 per person, you can claim the annual function exemption on both this and your Christmas party as long as your second event costs no more than £100 per head.
Guidance from HMRC says it does not expect employers to keep a cumulative record, employee by employee, of functions attended. Instead, the cost per head for each function should be calculated, then the cost per head of subsequent functions should be added.
If the total cost per head for all of your events in a year exceeds £150, you can use the exemption on whichever functions best utilise the £150, while the others will be taxable.
It wouldn’t be Christmas without presents, so sending your employees a hamper or a box of chocolates could be an easy, COVID-safe way to celebrate the end of the year.
Under the trivial benefits rule, you can give your staff gifts of a value up to £50 without paying tax.
To qualify, the gift can’t be given as a reward for the employee’s work or performance, and it can’t be in the terms of their contract. It can’t be cash or a cash voucher, either.
This rule can be used in combination with the annual functions exemption, so if you want to host an event and provide gifts too, both can be provided tax-free with the right planning.
Taxable rewards and bonuses
Any cash bonus you give to employees will count as their earnings, so you’ll need to add the value of it to their other earnings and deduct and pay tax and National Insurance through payroll.
If you give a non-cash gift that doesn’t fall within the trivial benefits rule, you’re required to report it to HMRC and pay class 1A National Insurance on its value.
For each employee who has received a taxable benefit, you’ll need to submit a P11D form by the end of the tax year. HMRC might also ask you to submit a separate form, called P11D(b).
Get in touch for help with business tax planning.