How to avoid the works Christmas cracker blowing up in your face

Lovewell Blake VAT expert Rob Geary in festive gear

Lovewell Blake VAT expert and Christmas party guru Rob Geary Picture: NEWMAN ASSOCIATES - Credit: Newman Associates

The Christmas works party is seen as one way companies can say ‘thank you’ to their workers — and sometimes their wider business family — while casting off some of the ghosts of the past.

In true Yule-tide spirit, it’s the time for bosses to show their human side and engage in light-hearted revels with their workforce — and hopefully show generosity through a timely Christmas bonus.

But the furore over an alleged Christmas party held in Number 10 Downing Street at the height of the pandemic on December 18, 2020, shows that even one moment of pause from the cares of the day job can have unwanted repercussions.

Prime minister Boris Johnson is facing serious heat over a reported festive bash which his spokesman has insisted “was not a party” and that no coronavirus rules were broken.

Policing minister Kit Malthouse suggested there may have been circumstances such as distancing between attendees which would have permitted the gathering — despite London being in Tier 3 banning social mixing indoors at the time. But it’s not been enough to lower the temperature as newspapers and opposition politicians continue to attack No 10 over possible double standards.

Hairs have been forensically split and a fierce public debate has ensued.

With much lighter-touch Covid rules now in place, Christmas works dos have returned this year — but Covid and home working may be just one of a series of challenges to them.

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As Rob Geary, VAT expert at regional accountants Lovewell Blake, points out, quite apart from pandemic considerations there’s the potential tax hangover to consider.

After last year when festive celebrations were largely impossible due to Covid, many workers have been looking forward to the return of the office Christmas party this year. 

But those generous employers who do choose to dispense some festive cheer need to be aware of the potential financial implications, he warns.

“When an employer rewards employees for their hard work through gestures such as a Christmas party, HMRC considers this to be for legitimate business purposes, and so the VAT incurred on the costs of providing that entertainment is usually recoverable — subject to any partial exemption restrictions,” he points out.  

“This differs from business entertainment, such as business meetings with customers, where VAT recovery is generally blocked.

One of the exceptions to this are if the party is solely for directors, partners or sole proprietors of the business — although where directors and partners of the business attend events together with their employees, HMRC accept that VAT incurred on costs is recoverable in line with the normal rules, he says.

Another is if employees are acting as hosts to non-employees. “Some employers allow guests of employees and other non-employees to attend Christmas parties. This is a generous gesture on the part of the employer, but HMRC is rather more Scrooge-like. It would expect the business to apportion the VAT incurred on costs based on headcount, with the portion relating to entertaining non-employees being blocked from recovery under business entertainment rules,” he says.  

Some employers like to enhance the festive celebrations by giving their staff gifts. But once again, these may fall foul of the rules.

“Under current VAT rules, the input tax on the total of gifts made to the same person in any 12 month period can be reclaimed, provided all gifts to that person amount to less than £50 net cost during the period.”

So an employer mulling whether to give their staff a £65 basket of chocolate goodies, an £85 bottle of Champagne, or a £7.99 cheese board from the local supermarket, should the choose a bargain cheese offering if they wanted to avoid a VAT charge — although whether their employees might then view their boss as Scrooge is another matter, he says.

“If employers are looking to spend a little more and give gifts exceeding the £50 limit per person, they must either pay output tax on the gift given away — after claiming the input tax initially under the usual VAT rules.

Alternatively, you can choose not to claim the input tax in the first place, which will mean you have no obligation to pay any output tax.

“It’s not just the employer who needs to think about the tax implications of those Christmas gifts. While gifts with a value of less than £50 are regarded as a ‘trivial benefit’ by HMRC, more expensive presents may mean there is a tax benefit to be accounted for — and an increased tax bill may just take the shine off that Christmas sparkle.

For some, the arrival of the Omicron variant of Covid delivered the death-knell to the Christmas works bash.

But others have decided to go ahead — testing our ability to navigate the tricky mix of business and pleasure which Christmas parties present.

Employment lawyer Louise Plant of Prettys advises employees not to forget that they are still ‘at work’ — even if it is a works party. 

“Although you may be in a different place, the law may recognise your party venue as an extension of your workplace, with the same rules about behaviour still applying. Remember that inappropriate behaviour could result in you being guilty of ‘misconduct’ and on the receiving end of disciplinary action because your actions are damaging your employer’s reputation,” she says.

“As an employer, it is worth reminding everyone what behaviour is expected. There is case law suggesting that an employer may be found responsible for their employees’ actions (even if they didn’t condone them), if there is a clear link between the employment and an incident which occurs. Employers should be aware of how to protect themselves in advance. Carrying out a risk assessment in relation to the venue, travel arrangements and the amount of alcohol being provided should help to identify any potential hazards.

“If an incident does arise, it is important that employers take steps to record, and investigate, the allegations being made and take appropriate action. Linked to this, it is important to ensure that up-to-date insurance policies are in place to cover you and your employees’ welfare and liabilities.”

There are pluses too, she points out.

“Christmas parties are a great opportunity for colleagues to socialise,” she says. “It is a shame that these considerations are needed but they may lessen the long term hangover should things go wrong.”