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What does “annual” mean in terms of the Christmas and annual parties tax exemption?
29 April 14 | By: Jas Jhooty
In this week’s article we highlight the practice of some HMRC officials who deliberately misinterpret tax legislation to incorrectly revoke the £150 per head Christmas party exemption in certain circumstances.
Annual parties and functions
Most employers are familiar with the following legislation found at S264 ITEPA 2003:-
(1) This section applies to an 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.
(2) Where in the tax year only one annual party or similar annual function to which this section applies is provided for the employer’s employees, or the employees in question, no liability to income tax arises in respect of its provision if the cost per head of the party or function does not exceed £150.
(3) 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 (“the exempt party or parties”) if the cost per head of the exempt party or parties does not exceed £150 or £150 in aggregate.
(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.
(5) That total cost includes any value added tax on the expenses incurred in providing the party, function, transport or accommodation.
Effects of this legislation
What this means in practice is that employers can spend up to £150 (inclusive of VAT) per head on an annual party (or parties) usually at Christmas and not have to worry about any taxable consequences. If the £150 limit is exceeded then the whole of the cost per head becomes taxable not just the excess above £150. All the employer has to do to maximise the effects of the exemption is to invite more people (e.g. spouses) to the event to lower the cost per head to below £150.
Meaning of “annual”
All of the above is well understood by most employers as this legislation has been around for a number of years and was previously encapsulated in an extra statutory concession. However it has recently come to our attention that some HMRC Employer Compliance Officers (ECOs) are deliberately misunderstanding the common definition of the word annual as construed when this legislation was enacted.
These ECOs are insisting that if an employer has not provided any party in a given year then the exemption is no longer valid for all previous years. They are then seeking to retrospectively tax the costs of all previous year’s annual parties.
Our interpretation of the word “annual” in respect to this legislation is that the party or event should occur at specific times of a year (e.g. at a summer barbecue and/or Christmas party) so the £150 exemption cannot be used piecemeal throughout the year. Once an exemption is claimed under S264 ITEPA 2003 that satisfies all of the necessary conditions prevalent at the time, there should not be any question of it being retrospectively revoked by HMRC based on any future circumstances.
The view of these particular ECOs completely go against the spirit in which this exemption is written. I.e. to permit employers to reward their staff annually at a special time of the year (e.g. Christmas), by hosting a party without having to worry about any taxable consequences arising, as long as the costs per head are reasonable.
Sometimes for very real commercial reasons (e.g. as a result of the economic downturn), an employer may simply not be able to afford to host a party for a particular year. Nowhere in the legislation does it state that the employer must continue to make such parties available to their staff year on year or else risk the tax exemption being removed for earlier years. In fact no case law exists on this subject and these HMRC ECOs are using strong arm tactics to bully employers into believing that they are right in their incorrect interpretation of this aspect of tax law.
How emTax can help
Fortunately emTax has a representative, Jas Jhooty on HMRC’s benefits and expenses sub-group which is a HMRC-sponsored forum that exists to provide a place where members can discuss a range of issues relating to benefits and expenses provided by employers to their employees, and how they are subject to income tax and National Insurance contributions with HM Revenue & Customs and HM Treasury representatives.
This issue has been tabled as an agenda item at the next meeting scheduled for mid-June for HMRC’s central policy unit to provide their comments on their interpretation of the word “annual” in the context of the annual parties exemption.
If you are facing similar problems of having to negotiate with intransigent HMRC officials on this or any other employment tax matter, please do not hesitate to contact us.
Our consultants are experts in dealing and negotiating with HMRC and have an excellent track record of achieving favourable outcomes for our clients.
UPDATE on 07/05/2014
We have received a reply from HMRC’s central policy unit who have confirmed that our interpretation of the word “annual” in the context of the annual party exemption at S264 ITEPA 2003 is indeed correct. There is no requirement for a party to be held every year for the terms of the exemption to apply. The word annual is to be used in reference to the total amount that can be spent by the employer on all functions in a particular year.