If you are planning on spreading some festive cheer for your employees through a virtual staff party this winter, you will need to be aware of the potential tax implications.
Despite traditional office parties not being possible this year, many businesses will consider carrying out this function via a virtual platform to lift the spirits of employees after a tough year. However, all alternatives will need analysing with tax exemptions for employees in mind.
Reporting social functions and parties
If you want to provide a social function or annual party for your employees, you will have specific tax and reporting obligations to adhere to. All payments and reporting depend on the following:
- If the event is a yearly occasion
- If the event is open to all employees
- Whether an employee is a director and their earnings
- If the event costs more than £150 per head
- How many events you provide each tax year
Taking advantage of tax exemptions for functions
If you are a UK-based business, you can take advantage of the annual function exemption, meaning you do not have to pay National Insurance Contributions (NIC) and tax on costs for yearly social events designed for employees.
This exemption offers a yearly limit of £150 per head, for employees and non-employee guests. Therefore, payments will only be exempt on a festive event if you have not used this yearly exemption on another occasion.
The exemption examines all end-to-end costs for the event, including VAT. For an occasion to be eligible, it must be open to all employees, or if there are several events, employees should be able to attend one.
If you breach this limit, you must cover the NIC and tax for ALL of the costs, not just the breach.
Therefore, with social distancing restrictions in place, this suggests that an online meeting would qualify as a location. But employers will need to collect the necessary data to be able to demonstrate attendance, for the event to be eligible under the annual exemption. Evidence of this could be through providing drinks, food and entertainment, such as a live comedian, musician or a quiz at an agreed time.
The legislation does not specify that the event’s costs need to be incurred by the employer. However, this may be the most suitable option.
Instead, employers could give staff a budget for their beverages and food, to reclaim on expenses, but, in a review, this may be more difficult to prove as a seasonal event rather than a series of separate events.
Tax-free alternatives to festive events
If planning a virtual party is not feasible, employers could gift festive presents to employees. With the trivial benefits rule, employers can gift up to the value of £50, including VAT, without paying tax on the item. However, this gift must not be in the form of cash or a voucher which can swap for money, or in exchange for work.
Eligible gifts are similar to hampers, presents or vouchers for drinks and food. Additionally, the cost of minor expenses, such as a gift bag, should be included in the total value of the present.
Employers can benefit from both the annual function exemption and the trivial benefits rule.