Contractors’ Questions: Are HMRC’s Christmas party rules really this generous, and can I bring a friend?

Contractor’s Question: With Christmas fast-approaching, can I just check that the HMRC rules concerning an annual party are as generous as this Contractors’ Questions article indicates?

In other words, is it really the case that the cost per head in HMRC’s eyes, is measured per head of party-goers, such that if there was one director and nine friends and family attended, the party could cost up to a small fortune of £1,500 but still be reimbursable?  

Please note, this is rather hypothetical, as I realise this year that the government’s ‘rule of six’ to help stop the spread of coronavirus would apply here in England, meaning nine people would be prohibited.

However, I’ve got a second concern. I’d like some confirmation please on who, precisely, can attend the party (such as friends, for example). I ask this because I notice here in HMRC’s related guidance that it talks of “members of the household” being directors’ guests – so not friends. Or am I misinterpreting the guidance?

Expert’s Answer: Firstly, yes -- if a limited company director and nine friends were to attend (and always assuming that the event was an ‘annual party or similar annual function provided for an employer’s employees’), the exemption would be available under ITEPA s264.  

However, I would caveat that in such an extreme case the problem is likely to be not with the Benefit-In-Kind legislation, but with demonstrating to HMRC that the expenditure was a legitimate business expense (i.e., incurred ‘wholly and exclusively’ for the purposes of the trade). 

Clarity on cost per head

But that is a separate and distinct issue. I consider that both the legislation and HMRC’s guidance are completely clear on the ‘cost per head’ point, which is what you ask about.

In fact, no liability arises in respect of a party if the cost per head does not exceed £150. And the legislation defines ‘cost per head’ as below:

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.

As to your second concern, yes, I think you may have misread the guidance.

What that HMRC guidance is getting at

Where the exemption is not available because the conditions are not fulfilled (e.g. where the cost per head exceeds £150, or it’s not an ‘annual event’), the normal BIK rules kick in. 

Under those rules, an employee or director is liable to tax not only on benefits provided to him/her personally, but also on benefits provided to members of his/her ‘family or household’.  That is what the last section of EIM21690 -- the guidance you refer to -- is getting at.

There is nothing in the law or HMRC guidance to say that the exemption applies only if the party is restricted to employees, directors and members of the family or household of employees or directors. So in short, having your ‘plus one’ as a friend, is not a problem.

Other problems

Having said all that, please note a word of caution relating to the ‘party of nine’ (or six this year) and the issue of it not falling foul of the £150 per head limit.

A director in the said-circumstance could encounter other problems with HMRC in such an extreme case – either on the basis that the expenditure wasn’t ‘wholly and exclusively for the purposes of the trade’ (as I mentioned at the outset), or even that, based on the facts and depending on the circumstances, it could be argued that this was not in substance a function ‘provided for an employer’s employees’ if employees were in fact a small minority of those present. The counter-argument being that if the employees control the guest-list, the function is provided ‘for’ them. Enjoy your hopefully tax-free Christmas party!

The expert was David Whiscombe, a consultant for chartered accountancy firm BKL.

Thursday 1st Oct 2020
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Written by David Whiscombe

David Whiscombe is a consultant to North London accountants BKL, where he was formerly Senior Tax Partner.  He now combines technical tax writing with an active practice in the resolution of tax disputes and work as an expert witness.   

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