Around this time of year, we are often advising clients on the different tax-efficient ways to treat staff, and usually, that includes the annual Christmas party. The 2020 festive season is going to look a little different, as the usual Christmas ‘do’ is off the cards.
In a ‘normal’ year, you don’t have to report a party or social event to HMRC for tax purposes, as long as it meets all of the following criteria:
- £150 (incl. VAT) or less per head
- annual, such as a Christmas party or summer barbecue
- open to all your employees
But thanks to the wonderful world of video calls, many employers have been taking their work socials online. So, what does that mean for the tax treatment of ‘virtual parties’?
Do I need to declare the cost of a virtual Christmas party to HMRC?
As an employer, you can hold a virtual party and it will be classed as an annual function, provided the rest of the normal criteria is met. This means all employees must be invited and it must cost less than £150 per head. You can even provide each employee with a food and drink hamper to enjoy at the “virtual” party, providing the cost is within the £150 exemption.
If you operate a fairly big company which makes virtual parties a little difficult or awkward (staring at 150 faces on Zoom isn’t quite the same as the 3-course meal at the local Hilton hotel), you can also host separate parties for different departments, as long as all of your employees are invited to attend one of them.
Can I give staff a gift this Christmas to make up for the lack of a Christmas party?
Yes, thanks to the Trivial Benefits Exemption that came into force back in April 2016, employers have much greater freedom in gifting to staff without the worry of hefty tax implications. However, the gift must fit a certain criterion and the exemption is less than if it’s an event that fits the criteria above, so if you’re thinking of buying small gifts for your team in the run-up to Christmas, here’s what you need to know.
The Trivial Benefits exemption applies as long as the benefit meets the following criteria:
- the cost of providing the benefit does not exceed £50 (or the average cost per employee if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person)
- the benefit is not cash or a cash voucher (non-cash vouchers, e.g. a voucher that can only be exchanged for goods, are allowed)
- 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
Amongst other benefits, this exemption reduces the need for extra paperwork as exempt trivial benefits need not be reported on the P11D or P11D(b).
Is there anything that could mean the gifts don’t qualify?
Yes, so you need to be careful. If the individual benefit exceeds £50 (or an average of £50 per head, inclusive of VAT), the whole amount is taxable as a benefit in kind, not just the excess over £50. There is no limit on how many trivial benefits an individual can receive, except individual directors of ‘close’ companies cannot receive trivial benefits that amount to more than £300 in any one tax year. A company is ‘close’ if it is privately owned and controlled by five or fewer individual shareholders or any number of directors who are also shareholders. The majority of private companies will be ‘close’ companies.
Where the employer is a ‘close’ company, the total cumulative value of the benefits provided to an individual director (or a member of their family or household) must not exceed £300 per annum. If this ‘annual exempt amount’ is exceeded, then the full cost of the trivial benefit that takes the total above the £300 ‘cap’ will not be covered by the trivial benefits exemption.
Of course, saving tax isn’t the main priority when looking at rewarding staff. Showing genuine appreciation at any time of year can help boost team morale and aid staff retention. For more advice on trivial benefits and other tax exemptions, including the annual events exemption, please contact our tax team on firstname.lastname@example.org