Have a virtually tax free Christmas

This is a time of the year when your staff will usually be looking forward to the firm’s annual Christmas bash. With the current COVID restrictions, this year will be a little different but we thought it might be timely to provide some information about the best way to organise events without falling foul of HMRC.

December usually gives us an excuse to let our hair down and enjoy a well-earned celebration with our work colleagues and partners. The cost of an annual staff party or similar function is allowed as a deduction for tax purposes. However, the cost is only deductible if it relates to employees and their guests, which would include directors in the case of a company, but not sole traders and business partners in the case of unincorporated organisations.

Also, as long as the criteria below are followed there will be no taxable benefit charged to employees:

1. An annual Christmas party or other annual event offered to staff generally is not taxable on those attending provided that the average cost per head of the functions does not exceed £150 (inc. VAT). The guests of staff attending are included in the head count when computing the cost per head attending.
2. All costs must be taken into account, including the costs of transport to and from the event, accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring.
3. HMRC has recently confirmed that the annual parties exemption can also apply to virtual parties, so that the cost of providing food, entertainment, equipment etc. incurred in hosting a virtual event, will be exempt, subject to the normal conditions of the exemption being met.  They have also included the following example: ‘A company holds one annual function in a tax year and does so virtually using IT. All employees are invited and each is provided with a hamper consisting of some food and drink to be enjoyed by the attendees during the party. The total cost per head is £100 which is within the £150 exemption and so the exemption applies.

If the £150 limit is breached employers can pick up the tax cost by using a PAYE settlement agreement.

VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

If you have any questions about anything covered in this brief guide, please don’t hesitate to get in touch with Charles Green on 020 8652 2450 or email crg@clarksonhyde.com

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