Further to our October 2020 article ‘Merry virtual Christmas – alternatives to the annual Christmas party’ where we discussed alternative options for employers not being able to organise Christmas parties for their staff, it is important that careful consideration is given to the employment tax and NIC implications of any alternatives. Some of the alternative options listed in our October article included:
- holding a virtual event;
- making gifts such as retail vouchers, hampers, mulled wine (or non-alcoholic equivalent), a bottle of bubbly, or Christmas biscuits;
- awarding a Christmas bonus (one off so as not to create an expectation or precedent); or
- allowing an early finish/extra half day holiday.
What are the employment tax and NIC considerations for a virtual Christmas event?
We will all probably agree that the 2020 festive season will be unlike any other. Being in lockdown, organising virtual Christmas parties appears to be an obvious alternative, with employers considering a range of options, from online cookery classes, virtual pantomime, to streaming live music performances and magic entertainment shows. The question is how would these be treated for employment tax and NIC purposes?
In the UK, employers can utilise the annual staff function exemption (Section 264 ITEPA 2003) for Christmas parties provided that it has not been used in full against other annual events. When it applies no tax or NIC is payable on costs relating to an annual social events organised for employees. There’s a limit of £150 (including VAT) per attendee (including non-employee guests) and where this limit is exceeded, the employer is required to cover tax and NIC for all the costs, not just the exceeded amount. For an event to qualify for the exemption, it must truly be an annual event and it must also 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).
So does a virtual event qualify? A rational approach suggests that an online/virtual event should potentially qualify as an annual social event and nothing in the legislation specific suggests that it would not. HMRC have now confirmed that the exemption will apply to costs associated with virtual parties in the same way that it would for traditionally held, parties. Therefore, the cost of providing food, entertainment, equipment and other expenses incurred for the purpose of hosting a virtual Christmas event, will be exempt, subject to the normal conditions of the exemption being met.
Where employers do seek to utilise this exemption for a virtual event they should would still need to keep an audit trail of the invitation and be able to demonstrate attendance at the virtual event for it to meet the various criteria and qualify. Employers will therefore need to ensure that there is a way to collect the required data.
What about seasonal gifts?
Giving gifts such as non-cash retail vouchers or Christmas gifts/hampers to employees appears to be another popular alternative for many employers this year.
Such gifts can potentially be covered by the trivial benefit in kind exemption (Section 323A ITEPA 2003). The exemption applies where all of the following conditions are met:
- the cost of providing the benefit does not exceed £50 (including VAT and delivery);
- the benefit is not cash or a cash voucher;
- the employee is not entitled to the benefit as part of any contractual obligation; and
- the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services).
Where the above conditions are all met, there are no tax or NIC liabilities for either the employer nor the employee.
Are Christmas bonuses taxable?
For some employers paying Christmas bonuses is another option which could be well received by employees. However, being cash, the bonus is fully taxable and liable to employer’s and employees’ Class 1 NIC contributions under PAYE. Tax and employee NIC deductions would of course result in a lower amount being delivered to employees, with an additional employer NIC cost for the employer.
Can a PAYE Settlement Agreement be used for taxable gifts and virtual events?
It is important that employees feel valued in these challenging times and whatever option employers go for, the tax and NIC implications should be considered to ensure that these do not dilute the effect of an employee receiving a gift or attending a virtual party. An employee certainly won’t thank an employer if they have to pay tax on a Christmas hamper for example.
For taxable gifts and non-qualifying virtual parties a PAYE Settlement Agreement (“PSA”) can be used. A PSA is an agreement between an employer and HMRC which allows an employer to pay the tax and NIC due on certain benefits on a grossed-up basis. Employers who do not have a PSA, and would like to obtain one to deal with such costs must apply for a PSA from HMRC. Employers with a PSA should check the scope of their agreement to check that such costs are included. Our previous article provides further information on PSAs.