Have yourself a merry little Christmas

With Christmas just around the corner, thoughts may be starting to turn towards festive celebrations and the annual Christmas party. This year, however, the traditional Christmas party is likely to look very different.

The past year has been anything but easy but with lockdown restrictions beginning to ease slightly ahead of the festive period, it’s important to reflect on the successes of the year and to spread some festive cheer amongst your employees, many of which will have been working remotely for some time.

There are several options available to employers when it comes to rewarding and recognising their staff but to ensure that you keep HMRC off the gift list, it’s important to consider the tax implications of any benefits you may look to provide.

Annual Functions

Social events organised for employees are generally taxable benefits although employers can take advantage of the annual function exemption. If the exemption is available and the relevant conditions are met, the events can be free of tax and national insurance.

For an event to be eligible for the exemption, it must meet the following conditions:

• It must be open to all employees to attend, or, alternatively, if there are several events (by location or office), all employees should be able to attend one.
• It must be an annual event i.e. a Christmas party
• The cost of the event per attendee (including non-employee guests) must not exceed £150 per head inclusive of VAT.

Current social distancing restrictions are likely to mean that a physical event will not be possible for all but the smallest of businesses this year. As an alternative, many employers will be considering a virtual Christmas event and in recognition of the shift to online parties and entertainment, HMRC have confirmed that the costs associated with such events can also qualify for the annual function exemption as long as the relevant conditions are met.

The exemption will apply to the normal costs of the event e.g. entertainment provided by a third party such as a magician, and will also cover the provision of food and drink. You could therefore consider sending your employees a luxury hamper to enjoy with the Christmas party and this will be free of any tax charges, providing you stay within the relevant cost limits.

This may be the year to give your annual Christmas function a bit of an alternative twist – you might consider providing an online event such as a cocktail making class and sending your employees the ingredients, or perhaps a wreath making or Christmas decoration activity. As long as you meet the annual function exemption conditions, these types of events will also be covered.

Employers planning a virtual event this year should consider its organisation very carefully. HMRC may require evidence to demonstrate attendance at an online event so a simple register of attendees should be retained along with details of the costs incurred in holding the event.

Staff Gifts

Christmas is a time for giving so you may be considering providing your staff with a small gift.

A gift of cash is taxable as earnings in the normal way so if you are looking to provide a Christmas bonus, this would need to be included in the payroll. There are, however, some gifts that may meet the trivial benefits exemption and can be provided on a tax free basis.

The conditions for a benefit to qualify as trivial are as follows:

• The gift not be in the form of cash or a cash voucher (non-cash vouchers such as gift vouchers are acceptable)
• The gift must not cost more than £50 inclusive of VAT
• The gift must not be awarded as a form of recognition for services performed by the employee

Traditional seasonal gifts such as a turkey, shopping vouchers, a bottle of wine or a box of chocolates will generally fall within the trivial benefits exemption as will non-traditional gifts providing the cost is less than £50 per person.

Gifts provided to employees in excess of this cost are technically taxable but you may consider entering into a PAYE Settlement Agreement with HMRC to bear the cost of any tax and NIC arising on the gifts rather than passing this cost on to your staff.

Having your (Christmas) cake and eating it too

As the annual function and trivial benefits exemptions are entirely separate reliefs, they can work alongside either other. Not only can you provide your employees with a Christmas function, you can also provide them with a small gift to enjoy.

There has never been a better time to show your employees your appreciation but make sure that you stay within the limits to maintain tax efficiency – if your events or gifts exceed the costs detailed above, all of the benefit is taxable, not just the excess above the limits.

To discuss this further, please contact Stephanie Hurst.