Hooray! HMRC have confirmed that the usual exemption for annual parties will also apply to those held virtually, including gifts consumed at the party.
Though their guidance is still to be updated, HMRC have said; ‘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.’
From a tax perspective, legislation does not include a specific allowance for an employer providing a Christmas party for employees. However, HMRC does allow limited tax relief against the cost of providing social functions. Businesses will no doubt be pleased to know that relief will still be available even if an event is being held in a different format to normal due to the coronavirus restrictions providing that certain conditions are met.
So, a social event, such as a Christmas party, will qualify as a tax-free benefit if the following conditions are all satisfied:
- the total cost does not exceed £150 per head, per year
- the event is primarily for entertaining staff; and
- the event is open to employees generally, or to those at a particular location, if the employer has numerous branches or departments
What does ‘cost per head’ include?
The cost per head of an event is the total cost (including VAT) of providing:
a) the event, and
b) any transport or accommodation incidentally provided for persons attending it (whether or not they are the employer's employees)
divided by the number of people participating.
As long as the £150 limit is not exceeded, any number of parties or events may be held during the tax year. For example, there could be three parties, held at various times, each costing £50 per head. Please note that that the £150 is a limit, not an allowance. If this limit is exceeded by even £1, the whole amount must be reported to HMRC.
Are these events tax deductible?
The cost of staff events is tax deductible for the business. Legislation includes a let-out clause, which means that entertaining staff is not treated for tax in the same way as customer entertaining. The expenses will be shown separately in the business’s accounts - usually as 'staff welfare' costs or similar.
Is there a limit to the cost of an event?
There is no monetary limit on the amount that an employer can spend on a function. If a staff party costs more than £150 per head, the cost will still be an allowable deduction, but the employees will have a liability to pay tax and National Insurance Contributions (NICs) arising on the benefit-in-kind.
The employer may agree to settle any tax charge arising on behalf of the employees. This may be done using a HMRC PAYE Settlement Agreement (PSA), which means that the benefits do not need to be taxed under PAYE or included on the employees' forms P11D. The employer's tax liability under the PSA must be paid to HMRC by 19 October following the end of the tax year to which the payment relates.
The full cost of staff parties and/or events will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.
VAT-registered businesses can claim back input VAT on the costs, but this may be restricted where this includes entertaining customers.
