Annual Function Exemption; Is your company’s Christmas party tax deductible?

Annual Function Exemption is a good way for employers to benefit whilst rewarding their staff. Given the current climate, all but the smallest organisations will be holding their Christmas parties virtually. However, it is still important for companies to be aware of the tax implications of the annual function exemption.

How does it work?

Annual function exemption means that employers in the UK don’t pay tax or national insurance contributions (NIC) on costs relating to annual social events for their employees. There are restrictions though which employers must be aware of including a limit of £150 per attendee (including non-employee guests) per year. If the limit is breached, then the employer is liable to cover the tax and NIC for the total cost – not just the breach. In addition, the full cost of the event including the VAT must be taken into consideration. Furthermore, for the event to be eligible, it must be companywide and meet the requirements of a structured social event i.e. where food, drink and entertainment are provided.

Annual Festivities under COVID-19 Restrictions

Christmas parties will look a lot different this year with only very small companies being able to celebrate in person under social distancing regulations and local or national lockdowns perhaps negating this entirely. However, even with the reality of parties being conducted virtually, this will still equate as a location, but careful organisation is key for the virtual event to qualify. Organisers should consider the following:

• Online attendance at virtual events should be demonstrable
• Whole company online events might be difficult for larger companies so smaller events should be available so that all employees can attend
• Entertainment will need to be documented for example, hiring a magician, or running a live Christmas quiz
• Food and drink allowance– how will this be paid to employees? If they claim for food/drink under expenses, it might be difficult to claim that this is due to an annual event as opposed to a series of unrelated events in an audit situation

Trivial Gifts rule – a possible solution?

A good and inherently simpler alternative might be for employers to reward their staff with a gift of up to £50 (including VAT) in value, which is then tax exempt. The Trivial Gifts rule states that the gift should not be cash – or a voucher to be exchanged for cash – plus it shouldn’t be a reward for work undertaken by the employee. The two exemptions – Annual Function exemption and the Trivial Gifts rule – could, therefore, work in conjunction where employees are invited to a Christmas party with a voucher for party food or a food hamper to enjoy at the party. The key to ensuring the benefits is careful documentation and keeping track of all expenses – including minor expenses – as the devil is in the detail!

For any further enquiries on this topic, please don’t hesitate to contact us.