How does rewarding your staff this Christmas affect your tax position?

Christmas has traditionally been a time of year employers have celebrated, rewarded and thanked staff for their efforts. This has traditionally been done tax efficiently by making use of tax exemptions for annual staff events and/or the trivial benefits exemption.

This year, given the Covid-19 pandemic, this tradition of rewarding staff may actually have more importance in the healthcare sector. Staff in the NHS will have continued to work through the ongoing Covid-19 pandemic and will have found the year particularly challenging in all aspects.

So what can employers do to reward staff and hopefully boost morale and can this be tax efficient?

Given the year we have faced, employers can still provide non cash discretionary benefits up to the £50 limit (including VAT). This includes non-cash gifts such as gift vouchers, Christmas hampers, chocolates, bottles of wine etc. These will typically be tax/NIC free via the trivial benefits exemption, providing they have not been provided to reward staff performance or due to any contractual entitlement.

Gifts outside of this would be liable for tax under the benefits in kind legislation and practices may want to consider using a PAYE Settlement Agreement to settle any tax due directly with HMRC without impacting on the employees’ tax affairs.

But what about the annual function exemption that is traditionally used for Christmas parties?

Already, many employers have cancelled bookings for Christmas parties at venues, restaurants and other types of locations. With the latest restrictions placed upon the hospitality sector, it is highly unlikely that traditional Christmas parties will go ahead this year. Given this, and as an alternative, could an employer hold a virtual Christmas party and would the ‘annual function’ tax exemption apply?

The answer to the first part of this question is obviously yes. We have already seen how businesses and their employees have adapted using Teams or Zoom and the same methods could be adopted for the annual staff party. However, could such a staff party be tax exempt and what would this look like?

To answer this we need to look at the legislation and HMRC’s related guidance concerning annual staff functions. The key points in both are that an event:

  • must be annual in nature,
  • open to all staff (or all staff at a particular location); and
  • must cost no more than £150 per head (including VAT).

Interestingly, neither the legislation nor the guidance stipulates where an event has to be held, what form it must take or whether employees can attend/participate from different locations.

Therefore, on a strict reading of the legislation, it does not appear that holding an event “virtually” is outside the scope of the annual function exemption. However, following a series of correspondence with HMRC, we understand that there is some debate taking place within HMRC. HMRC provided an update on 9th November stating:

“We are currently debating the scope [of S264] and whether it extends to virtual parties in the manner suggested…. This is a matter under (urgent) consideration and…we will announce our interpretation of the legislation shortly."

Our view

The current legislation has no clause prohibiting the annual function exemption applying based on events being held “virtually” – there is no requirement for all employees to be at the same physical location. However, there are concerns over the longevity of any hamper or food provided (i.e. can it only be enjoyed during the event or will the hamper last for a number of weeks (e.g. chocolate boxes) and whether this fits the annual function exemption, the trivial benefit exemption or be taxable in full.

Given this is an area of concern and complexity, as well as presenting a need to think about events differently, HMRC is reviewing this in detail.