Tax-free virtual Christmas parties okayed by HMRC

HMRC have supplied the Association of Taxation Technicians (ATT) with the following statement:

“Having considered the scope of section 264 ITEPA03 (annual parties exemption), we are pleased to confirm that the exemption will apply to the costs associated with virtual parties in the same way that it would for traditionally held, parties. Therefore, the cost of providing food, entertainment, equipment and other expenses which may be incurred in hosting a virtual event, will be exempt, subject to the normal conditions of the exemption being met. It is important to note that the intention of the exemption is to allow for costs of provision which are generally incurred for the purposes of the event itself, and that the event, along with any associated provision, is available to employees generally. We will be updating our GOV.UK guidance shortly.”

Current rules allow employers to spend up to £150 per head (including VAT) towards the costs of an annual function such as a Christmas party without creating a tax or national insurance (NIC) liability for their employees and themselves – provided that certain conditions are met.

For a social event for employees to qualify for income tax and NICs exemption it must be an annual event (for example a Christmas or summer party) which is open to all staff generally or all staff at a location, if the employer has more than one location. No liability to tax or NICs arises provided that the total cost of the event (including travel and accommodation although that is unlikely to be applicable this year) is no more than £150 per head. If the employer has more than one annual event in a tax year, for all the events to be tax-free the combined cost per head of all the events must be under £150.

In addition to the exemption for an annual function, employers can also take advantage of the trivial benefits rules to make seasonal gifts to staff such as a bottle of wine or a Christmas pudding. Under the trivial benefits rules, employers can provide benefits costing up to £50 to an employee without tax consequences – provided that these benefits are intended as genuine gifts and not intended as a reward for their work.

When assessing whether an item falls within the trivial benefits rules all associated costs of the gifts must be factored in, including any VAT and also costs of postage, delivery or courier charges. For events such as cooking demonstrations where fresh food is supplied to the employee in advance, delivery charges could be significant.

For a gift to be trivial, and therefore exempt from income tax and NICs for both the employer and employee, it has to meet all of the following conditions:

  • it is not cash or a cash voucher (a normal gift voucher should meet this requirement);
  • the cost does not exceed £50 per employee (or average cost if provided to a group of employees and it is impractical to work out the individual cost);
  • it is not provided under a salary sacrifice or other arrangement; and
  • it is not provided in recognition of particular past or future services performed by the employee (a gift on the occasion of Christmas should meet this requirement).

There is an additional cap of £300 on the aggregate value of trivial benefits that can be paid to directors or office holders of close companies (companies owned and controlled by five or fewer participators, such as typical family companies) or employees related to them in any one tax year. However, beyond this there is no limit on the number of individual trivial gifts that can be given to an employee in any one year, provided each gift individually qualifies for relief and the employer is not trying to divide a larger gift into several smaller ones.

It should also be noted that this is an all or nothing exemption – if the cost of a gift (including VAT) exceeds £50 then the full value is taxable under the usual benefits rules.