Q. With Coronavirus restrictions in place throughout the country, this year a number of business will be unable to offer their normal staff Christmas party. Are businesses able to utilise the £150 exemption at another point in the year?

A. The good news is, that the annual function exemption which is contained in the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 s.264(1), explicitly states that it applies to an:

‘annual party or similar annual function provided for an employer’s employees and available to them generally or available generally to those at a particular location.’

Therefore, the exemption is not restricted only to a Christmas party, it can be used for an alternative functions throughout the year.

The exempt value for annual function/functions

The total value for an annual function which is exempt from Income Tax is £150 per head. ITEPA 2003 s.264(3) explains that if there is more than one function or party within a tax year, as long as the cost does not exceed £150.00 per person for both functions, it will remain exempt from Income Tax:

‘Where in the tax year two or more such parties or functions are so provided, no liability to income tax arises in respect of the provision of one or more of them… if the cost per head of the exempt party or parties does not exceed £150 or £150 in aggregate.

If however a business had two parties in a tax year and the combined value of both parties exceeds £150 per head, then only one of parties will qualify for the exemption. The value that is reported as a benefit to the employee is calculated at the total cost of the second function, not just the excess above £150. Examples of this can be found at Employment Income Manual reference EIM21691.’

What to include in the cost per head

When calculating the cost per head, we do not only need to consider the cost of the function itself. We also need to include the cost of any transfer or accommodation provided:

‘264(4) For the purposes of this section, the cost per head of a party or function is the total cost of providing–

(a) the party or function, and

(b) any transport or accommodation incidentally provided for persons attending it (whether or not they are the employer’s employees),

divided by the number of those persons.’

Please note that the cost per head included the number of the persons attending the function, not just the employees.

Further guidance

For HMRC guidance please refer to https://www.gov.uk/expenses-benefits-social-functions-parties

There is also a useful breakdown of some cases in this area on Croner-I (available to subscribers only) at: 433-750 Annual parties and functions