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Managing your Christmas party tax exemption in 2020

Tis the season…but not quite in 2020. With so many Christmas parties cancelled this year, businesses cannot take advantage of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 s.264(1) Christmas party tax exemption. But all is not lost…

Christmas party tax

What is the ‘Christmas party’ tax exemption?

According to the Act, the tax exemption can be applied to:

‘annual party or similar annual function provided for an employer’s employees and available to them generally or available generally to those at a particular location.’

As a result, you can use the ‘Christmas party tax exemption’ for alternative functions throughout the year. So, if you’re missing out on your annual Christmas party this year like so many others, you can host another company function later on once COVID-19 restrictions on social mixing have been lifted.

Total value of the exemption

The tax exemption, which applies to Income Tax, is £150 per head, as the ITEPA 2003 s.264(3) explains: if you host more than one function or party within the same tax year, as long as the cost does not exceed £150 per head for both functions, it will remain exempt from Income Tax. It states:

‘Where in the tax year two or more such parties or functions are so provided, no liability to income tax arises in respect of the provision of one or more of them… if the cost per head of the exempt party or parties does not exceed £150 or £150 in aggregate.

If however a business had two parties in a tax year and the combined value of both parties exceeds £150 per head, then only one of parties will qualify for the exemption. The value that is reported as a benefit to the employee is calculated at the total cost of the second function, not just the excess above £150. Examples of this can be found at Employment Income Manual reference EIM21691.’

What is included per head?

All persons are included when calculating cost per head, not just employees.

Alongside the cost of the function itself, we need to include the cost of any transfer or accommodation provided:

‘264(4) For the purposes of this section, the cost per head of a party or function is the total cost of providing–

(a) the party or function, and

(b) any transport or accommodation incidentally provided for persons attending it (whether or not they are the employer’s employees),

divided by the number of those persons.’

Cardens Accountants Partner, Keith Hall said: “The £150 per year can be used in one go on a big staff event or a number of times during the year so 10 events at £15 per heard for example. It’s a “use it or lose it” allowance so you can’t carry forward any unused allowance into the next accounts year.”

Count On Cardens

Cardens Accountants is interested in maximising tax planning opportunities that can be applied all year round. The team has extensive experience in this area of work and always fight as hard as we can for our clients.

Cardens Accountants’ Tax Planning service makes legitimate use of the Tax Legislation and Case Law, so that you are not put at additional risk from a full HMRC Enquiry, or where there are risks, these are pointed out to you. Get in touch on 01273 739592 to discuss your requirements.

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