Caroline Harwood: Tax implications of Christmas parties during Covid-19

As we are now well into autumn, and Christmas decorations start making their way into shops, employers may have started to think about their annual Christmas party; but this year, it is different.

With Covid-19 (Coronavirus) restrictions likely to be in place until Christmas in some shape or form, employers will be scratching their heads over what the alternatives might be for Christmas parties, and what the potential tax implications are of those alternatives.

The usual rules

Generally, the usual annual function exemption will only apply if all employees (or all employees in one office or team location) are invited and the value-added tax (VAT) inclusive cost per head is less than £150.

Unfortunately, HM Revenue and Customs (HMRC) has not indicated that there will be any relaxation of these exemption rules in light of the pandemic, so employers may have to think about how else they can celebrate Christmas with their employees, especially with so many still working from home.

Implications of not holding a Christmas party

First of all, some employers might be worried about not holding a Christmas party due to the consequences it might have on the exemption in the following years; something that HMRC has looked at in the past.

The exemption applies to an annual party or similar annual function. In the past, some HMRC officers have taken this phrase literally and concluded that if the party or function is not for a particular year, then the exemption will be lost in future years and even invalidates previous year exemptions.

The good news is that this is not correct. The above phrase is intended to mean parties or functions that are of an annual nature, such as a summer or Christmas party. In other words, something that could occur every year. Therefore, the understandable decision not to hold a Christmas party in 2020, will not have any impact on the ability to apply for the exemption in future (or previous) years.

What can employers give to employees instead?

As stated above, HMRC has not relaxed the annual function exemption rules, so employers may have to rely on other exemptions to celebrate Christmas.

With parties unlikely to go ahead, the most obvious exemption to focus on will be the trivial benefits exemption. Benefits are exempt from tax if the cost of providing the benefit does not exceed £50, is not cash or a cash voucher, the employee is not entitled to the benefit as part of any contractual obligation or is not provided in recognition of particular services performed by the employee as part of their employment duties.

Clearly, the £50 limit per employee is lower than the £150 per head limit for a Christmas party, but it is better than nothing. The types of things that could fall under this exemption would be a gift or vouchers that the employee could spend in supermarkets or other shops. This type of benefit would be exempt from tax and still allow employers and employees to enjoy the spirit of Christmas.

Caroline Harwood is head of share plans and employment tax at Crowe.