1. Annual event exemption
Where you host an annual event, which is open to all employees and the cost of this event is less than £150 per head including VAT, then the event does not create a taxable benefit. It is important to note that this is an all or nothing exemption, and that if the event was £150 or more, all the costs would be taxable.
The condition that this event happens annually has raised some questions this year because a virtual gathering/party (for example on Teams or Zoom) is likely to be quite different to previous year’s events. Fortunately, HM Revenue & Customs (HMRC) have confirmed that the costs incurred in relation to such events can be considered under the annual event exemption provided all the other conditions are met. As a reminder, these conditions are:
- be open to all employees
- be held annually
- cost £150 or less per person
2. Trivial benefit exemption
Another common exemption is the trivial benefit exemption. The conditions for this are the:
- total VAT inclusive cost is £50 or less
- benefit is not cash or a cash voucher (for these purposes, store vouchers are not cash vouchers)
- employee is not entitled to the benefit under their contract of employment, including under a salary sacrifice arrangement
- benefit is not a reward for services. Note: if the word ‘thank you’ appears it will be considered a reward for services!
A few ideas for utilising this exemption are a Christmas goodie basket/hamper delivered to your employees’ homes, or perhaps a non-cash voucher that they can use to order food/snacks and enjoy with their colleagues at a virtual party. Some have decided to provide a non-cash voucher to enable their employees to purchase a Christmas present for themselves this year.
Where we have seen employers get caught out in the past is where two separate gifts are provided but they are ultimately linked, and the total cost is more than £50 per person plus VAT. For example, if a company provided their employees with wine on the 15 December costing £30 and a hamper on the 16 December costing £45, HMRC would realistically argue they are one, linked gift and fully taxable, as the £50 limit has been exceeded.
What should you do next?
Once you have decided on an idea, you need to consider the tax and reporting obligations.
Reporting: If your Christmas event/gift meets one of the exemptions above, there is no tax due and no reporting obligations arise. If the conditions are not met and therefore a tax liability arises, there are a few options on how to report it depending on the circumstances. For example, a PAYE Settlement Agreement (PSA) may be appropriate so that you can pay the tax arising directly to HMRC and it does not have be reported on the employee’s form P11D.
Tax cost: In addition to the cost of an event or gift itself, employers are required to pay employer National Insurance contributions (NIC) on such items at 13.8%. However, assuming that you do not want your employees to have a tax liability on these items (they may not be happy if they received a tax bill because of the Christmas party), you will need to pay the tax too on a grossed-up basis which can be expensive. In some cases, the tax and NIC arising on providing such benefits can be more than 100% of the benefit cost, so it is important to consider this before proceeding.