people dancing

Employer plans for the festive celebrations

Nick Irvin, Manager, Employment Tax
07/09/2021
people dancing

As 2021 progresses – seemingly the quickest year in history – employers may be starting to think about their annual festive party, and how they can reward staff for the last year (and possibly two, if 2020 celebrations weren’t possible due to the pandemic).

While many employees are returning to the office on a full-time or part-time basis, many are still requesting or being encouraged to work from home. Like in 2020, this makes office festive parties tricky to plan.

This insight explains what the options might be for festive parties, and what the potential tax implications are of those alternatives.

The usual rules

Of course, with the current absence of most COVID-19 restrictions, many employers will be keen to plan a festive party in line with what they would have done in pre-pandemic times. In this case, the normal ‘annual function’ rules should be considered.

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.

This might mean that the many employees who are understandably cautious about attending large events may miss out. While this would not impact the exemption (as they would be invited), employers may be looking for alternative ways to celebrate with these employees.

Implications of not holding a festive party

It is understandable, during the current circumstances, if employers decide not to hold a large office party this year. These employers may 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 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 held in a particular year, then the exemption will be lost in future years and even invalidates previous year exemptions.

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, a 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.

Virtual festive parties

For some, working from home has become the norm; this might mean that a physical party might not be appropriate. Instead, an option of a virtual festive celebration might be something that employers could arrange.

HMRC have confirmed that where an annual function is provided virtually using conferencing technology, then the exemption is capable of being met provided all other conditions are also satisfied. The exemption would apply to the costs which are generally incurred for the purposes of the event itself.

What can employers give to employees instead?

As stated above, HMRC haven’t relaxed the key annual function exemption rules, so employers may have to rely on other exemptions to celebrate the festivities with their employees if a party (or virtual party) is not held.

The most obvious exemption to focus on will be the trivial benefits exemption. Benefits are exempt from income tax if:

  • the cost of providing the benefit does not exceed £50
  • the benefit is not cash or a cash voucher
  • the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements)
  • the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services).

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 income 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 Andy Hamman.


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Contact us

Andy Hamman
Andy Hamman
Director, Employment Tax
London