Virtual Christmas parties to be allowed under annual functions exemption
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)
27 November 2020
Justine Riccomini discusses the agreement by HMRC that allows virtual Christmas parties to be included in the ‘annual functions’ exemption.
A strange year
2020 certainly has brought its own peculiar challenges. Due to COVID-19, many businesses and institutions have gone from being completely office-based to being completely virtual. ICAS is a case in point.
Thanks to the introduction of various kinds of new and improved technology, all sorts of meetings have been taking place, and customer and staff entertaining has been no exception. Virtual wine tastings, quizzes, karaoke parties and similar events have been doing the rounds over the course of the Summer and Autumn months. So the question arose as to whether virtual Christmas parties could take place under the banner of the annual functions exemption at S.264 ITEPA 2003.
The representations
A small group of EPG members convened a meeting with HMRC policy to discuss the issue (as well as a number of other benefit in kind related issues affected by COVID-19) which were proving to be sticking points. HMRC’s initial stance was to disagree that a virtual Christmas party was essentially the same as a Christmas party held at a physical venue. As such, it was decided in late October that the EPG members would set out a case for changing HMRC’s mind on it and ask for a response to be provided as soon as possible so that employers could make plans.
The most pressing concern was for the exemption to cover Christmas 2020, but a secondary concern was that the legislation should be capable of dovetailing with societal and technological developments in future years. Virtual events of many types are likely to continue now they have started and been so successful, so this is also something which the EPG group thought HMRC needed to factor into its future strategic thinking.
Representations were made covering the following points:
- At this time, a change in legislation wording to accommodate virtual functions should not be necessary;
- Employers should have certainty prior to organising events that they either do, or do not face a tax charge;
- The current legislation and definitions (including ordinary dictionary definition meanings) within s.264 ITEPA 2003 do not prevent virtual functions from qualifying;
- Comparative guidance, such as the definition of “Training” as set out in EIM01210 includes virtual training - it is generally understood and accepted that online training can fall within s.250 ITEPA and the “venue” is the online platform.
What could potentially qualify
The EPG stated that the employer could utilise the £150 per attendee exemption to:
- provide an online Christmas party to employees
- cover the cost of facilitating the platform where necessary
- provide entertainment
- provide food (e.g. an M&S meal) and drink
Trivial benefits legislation tie-in
Employers could also potentially use the opportunity to send employees items through the post or by courier which fall within the trivial benefits exemptions.
The “always speaking” doctrine of statutory interpretation
A pertinent VAT FTT case serves to support the position (HMRC's defeat in Wickford Development Co Ltd and the Commissioners for Her Majesty’s Revenue and Customs, [2020] UKFTT 387 (see https://www.accountancydaily.co/property-developer-plays-blinder-vat-claim) and illustrates quite well how perceptions can change over time, leading to some HMRC interpretations drifting out-of-date.
Another VAT case, News Corp UK & Ireland plc v HMRC, also supports this position. In that case, the UT ruled that digital newspapers should have the same VAT treatment as physical publications. In that decision the focus reflected the “always speaking” doctrine, supporting the principle that legislation should take account of “relevant changes which have occurred since the enactment was originally framed”.
One final point on the legislation is that s.264 ITEPA 2003 provides for Christmas parties and other annual functions to take place regardless of the socio-economic circumstances. The other good thing about virtual events is of course that the employer has a record of who attended.
The media and the public mood
What was needed here was, put simply, a change of mindset from HMRC policy leads. Otherwise the newspaper headlines might be likely to read: “The Grinch who stole the Christmas party?”
From a socially responsible point of view, some employers who may choose to spend the money on providing online entertainment such as musicians, bands, magicians, quiz masters and theatre companies (or a combination of these) may even be assisting those working in the arts and entertainment industry to earn some much needed cash.
HR points
Employee wellbeing is key at the moment – get-togethers are vitally important, especially for those working from home. In addition, from an HR perspective, offering something to employees virtually supports the Equality, Diversity and Inclusion agenda as people can celebrate in their own way from their home. Not everyone feels excited about the idea of going to an alcohol-fuelled event and some even decline the invitation because they find it intimidating.
It may turn out to be the HR Director’s dream scenario: no fighting, no misbehaving on public premises, no dangerous liaisons, etc, etc. – the list goes on. Employers should be able to offer a socially distanced Christmas event which allows them to abide by the new lockdown rules as announced on 5 November or indeed the tiering guidelines of the coronavirus restrictions (whichever may apply at the time), meaning that people are unable to meet physically inside, even if they wanted to.
HMRC responded as follows:
“Having considered the scope of section 264 ITEPA03 (annual parties exemption), we are pleased to confirm that the exemption will apply to the 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 which may be incurred in hosting a virtual event, will be exempt, subject to the normal conditions of the exemption being met. It is important to note that the intention of the exemption is to allow for costs of provision which are generally incurred for the purposes of the event itself, and that the event, along with any associated provision, is available to employees generally.
We will be updating our GOV.UK guidance on this shortly.“
A bit of good news after a very strange year.
If you wish to comment on this article, please email the tax team on tax@icas.com or else start a conversation on CA Connect – the ICAS member discussion platform.