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posted on November 19, 2020
Most businesses take advantages of the statutory £150 exemption per staff member for running a Staff Christmas party without there being any tax implications (though they may not realise it!). With Coronavirus restrictions in place all over the UK, many businesses will be unable to offer their normal staff Christmas party. So is that lost if your Christmas party is impossible this year.
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 any alternative functions throughout the year.
The total value for an annual function which is exempt from Income Tax is £150 per head. If there is more than one function or party within a tax year, as long as the cost does not exceed £150per 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 the 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.
When calculating the cost per head, we don’t only need to consider the cost of the function itself but also the cost of any transport 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. I know it sounds more like Scrooge than Father Christmas but you need to know the facts in order not to fall foul of the detail.
HMRC has now confirmed, in response to significant lobbying, that where all normal conditions are met, virtual events can be included when considering the £150 exemption. Their Employment Income Manual has been updated to take account of this news and a simple example has now been added to their guidance:
A company holds one annual function in a tax year and does so virtually using IT. All employees are invited and each is provided with a hamper consisting of some food and drink to be enjoyed by the attendees during the party. The total cost per head is £100 which is within the £150 exemption and so the exemption applies.
So make sure you enjoy a tax-free Christmas celebration, however you do it.