As we’re now well into autumn, and festive decorations
start making their way into shops, employers may have started to think about
their annual festive party - but this year, it’s different.
With COVID-19 restrictions likely to be in place during the festive season in some shape or form, employers will be scratching their heads over
what the alternatives might be for festive parties, and what the potential
tax implications are of those alternatives.
Generally, the usual 'annual function' exemption will only
apply if all employees (or all employees in one office/team location) are
invited and the VAT inclusive cost per head is less than £150.
Unless the number of employees is quite low, or a large
restaurant is hired with many tables of six people, it is unlikely that the
usual annual function will be able to go ahead.
Unfortunately, HMRC have 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 the festive season with their
employees, especially with so many still working from home.
First of all, some employers might be worried about not
holding a festive party due to the consequences it might have on the
exemption in the following years; something that HMRC have looked at in the
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
The good news is that this isn’t correct. The above phrase
is intended to mean parties or functions that are of an annual nature, such as
a summer BBQ or festive party. In other words, something that could occur
every year. Therefore, the understandable decision not to hold a festive party in 2020, will not have any impact on the ability to apply the exemption
in future (or previous) years.
As stated above, HMRC haven’t relaxed the annual function
exemption rules, so employers may have to rely on other exemptions to celebrate
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:
Clearly the £50 limit per employee is a lot lower than the
£150 per head limit for a festive party, but it’s better than nothing. The
types of things that could fall under this exemption would be a gift or gift
vouchers (that are not exchangeable for cash) 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 festive season.
If you have any queries related to the annual function
exemption, trivial benefits function, or any other Employment Tax matter,
please contact your usual Crowe contact, and we will be able to assist.