As we’re now well into autumn, and the festive decorations start making their way into shops, employers may have started to think about their annual party – but this year, national audit, tax, advisory and risk firm Crowe, is saying ‘it’s going to be very 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.
Simon Warne, Partner in Crowe’s Kent office said: “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 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 the festive season with their employees, especially with so many across our region still working from home.”
Some 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 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 isn’t correct.
Caroline Harwood, Head of Share Plans and Employment Tax said: “The 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.”
So what can employers give to employees instead? HMRC hasn’t relaxed the annual function exemption rules, so employers may have to rely on other exemptions to celebrate the festivities.
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
- 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) and
- 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”, added Harwood. “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 Caroline.Harwood@Crowe.co.uk