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Tax considerations for staff entertainment in 2020

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This Christmas season is likely to look a little different to previous years. In normal years, December tends to be a busy month for festive get togethers with staff, business partners and suppliers. Whilst there are many options for holding a virtual event instead of an in-person one, some employers may simply decide to cancel this year’s Christmas parties, and instead opt to send a gift as a way of saying thank you.

Here, we look at the tax considerations for employers – whether they choose to host a virtual ‘do’ or provide a gift of appreciation.

Annual function exemption

The annual function exemption means that employers don’t have to pay tax or national insurance contributions on costs relating to annual social events organised for employees. There is a limit of £150 per attendee, including VAT. Should the cost go above that, the employee potentially has a taxable benefit in kind on the full amount; not just the balance over £150.  The £150 limit includes any transport and/or accommodation.

It is important to bear in mind that the £150 exemption is a “per tax year” and not “per event” exemption so, if, for example, employees attended an annual summer party with a cost of £75 per head and an annual Christmas part with a cost of £76 per head, you may only claim the exemption for one event.  If the combined cost is less than £150, you may claim exemption for both.

The tax on the benefit in kind can be dealt with in one of two ways; either:

  • By reporting the benefit on the employees’ forms P11D by 6 July following the end of the tax year, in which case the employees bear the tax, or
  • More typically, employers can arrange to settle the tax on the employees’ behalf by way of a PAYE settlement agreement (PSA).  If an employer opts to settle the tax on behalf of the employees by way of a PSA, they should contact HMRC as soon after the end of the tax year (5 April) as possible.  We can will be able to help you to set up a PSA, if required.

A virtual Christmas

In these unprecedented times, the office Christmas do will look very different this year with employers considering virtual Christmas parties over Zoom and providing their employees with, for example, cheese and wine to consume during the virtual event. 

Tax legislation has never really envisaged the concept of virtual parties and so, up to now, we had been left wondering if such an event would qualify for the £150 exemption.  HMRC have now confirmed that such events will be eligible for the exemption.  Employers should keep a record of those attending the event.

The cost of the function and any tax borne by the employer on their employees’ behalf will be an allowable deduction for income tax or corporation tax purposes.  The business can also claim back input VAT but this may be restricted where you are also entertaining customers.

Trivial benefits rule

For employers, a more straight-forward option this year may be to send employees a gift.

There’s no tax payable on benefits to your employees as long as ALL of the following applies to your benefit:

  • it cost you £50 or less to provide
  • it isn’t cash or a cash voucher
  • it isn’t a reward for their work or performance
  • it isn’t in the terms of their contract

The ICAEW states that “Employers could provide a hamper or a voucher for food and drink, for example. In this instance the trivial benefits exemption should apply, but in the absence of the elements of a Christmas party, the annual functions exemption will not be available.”

In the event that you provide trivial benefits as part of a salary sacrifice arrangement, please speak to us for further advice.

It is important to note that the annual function exemption and the trivial benefits rule can both be applied at the same time, so employers can organise a Christmas event as well as give their employees a gift.

Please contact us if you have any questions around the tax considerations for this year’s Christmas staff entertainment.

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