The Association of Taxation Technicians (ATT) is calling for urgent guidance from HMRC to avoid people enduring an unpleasant tax hangover because of their ‘virtual’ Christmas parties this year, as traditional face-to-face events are put on hold because of Covid
ATT is seeking clarity on whether a ‘virtual party’ – particularly one that includes a party box - will be eligible for the usual tax exemption that applies for annual parties.
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 liability for their employees and themselves – provided that certain conditions are met.
These include holding an annual event which is open to all staff generally or all staff at a location, if the employer has more than one location. 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.
ATT warns that with employers hurriedly considering alternative ways to express seasonal greetings and boost morale, the risk is that online events and so called ‘virtual parties’ could create unintended tax consequences.
Jeremy Coker, ATT president, said: ‘It is a pity that HMRC are still on mute about “virtual” Christmas parties.
‘Employers looking to arrange some seasonal fun for their staff after all the difficulties created by the pandemic may consider live-streaming events such as quizzes, food tastings, cooking lessons or “live” entertainment to share as a team – potentially with supplies of food, drink and other favours sent in advance to employees’ homes to enjoy during the event.’
Coker cited concerns that such a ‘virtual party’ may not be treated as a party for tax purposes – even though so many other activities such as conferences and training have been moved online.
‘We are also concerned that HMRC will seek to split out the cost of any food, drink or party favours sent to employees’ homes as a party box to accompany the online event, and treat this element as a taxable benefit because some employees could opt out of the event itself,’ he said.
ATT is urging HMRC to clearly state that it accepts that a ‘virtual’ party falls within the existing rules as an evolution of the meaning of an annual function.
Coker said: ‘This clarification is needed urgently because employers are thinking about what they can do for staff now. Indeed, some may already have taken decisions and booked events and supplies assuming the usual tax reliefs will apply and could get a nasty shock if they find that HMRC think differently.’
In addition to the exemption for an annual function, ATT said 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.
If HMRC do not accept that a ‘virtual party’ falls within the annual function exemption, one approach could be for employers to keep the entire costs of the event within the trivial benefits rules instead. These allow employers to 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.
Coker said: ‘Ensuring that the cost of any online event, including any party box, falls within the trivial benefits rules might be a solution for some but it still leaves the tax position uncertain where employers were planning – or perhaps have already booked – an event costing more than £50 per head.’
ATT also warns that this is not a solution for those employers who usually provide a gift under the trivial benefit rules already, in addition to a party. Where two gifts are made for the same purpose HMRC will aggregate the costs when applying the £50 trivial benefits limit; so employers who are used to using both reliefs in tandem might be caught out if the tax rules for parties do not operate as expected this year.
An HMRC spokesperson contacted Accountancy Daily to say: ‘Annual parties or events for employees are exempt from tax where the cost does not exceed £150 per head.
‘Festive events for staff will be different during the pandemic, so we’re confirming today that this exemption will also apply to the costs associated with virtual parties – including gifts for consumption at the party.
‘We will communicate this to stakeholders and employers, so they are aware of the rules when planning parties for their staff.’