As the winter months approach and the nights begin to roll in, many businesses start to plan and book their annual Christmas bash.
What is often the most anticipated gathering of the year can also be the most expensive, so a tax exemption can go a long way in boosting the budget.
Luckily, HMRC offers a specific ‘annual function exemption’ that allows employers to spend up to £150 per person on an event completely tax-free.
However, there are a few important boxes that must be ticked if your company wants to benefit from this unique tax saving.
What is the annual function exemption?
The annual function exemption is an HMRC rule that allows employers to host social events without them being treated as a taxable Benefit in Kind.
Employers can spend up to £150 per person without any Income Tax or National Insurance liabilities.
As it is labelled an ‘annual function,’ it is designed to apply to any recurring annual event hosted by an employer for their employees and can be used for things other than the Christmas party.
If your staff would prefer a barbecue in the summer months, or an Easter scavenger hunt in Spring, these could also be hosted tax-free.
When does an event become eligible?
For an event to qualify as tax exempt, it must meet three criteria.
Firstly, the event needs to be once a year or intended to recur annually. A one-off event, like a leaving do or a company anniversary party, will likely not qualify, as they are not regular fixtures.
Perhaps the most obvious staple of workplace culture is the Christmas party, which is why many companies choose to allocate their annual exemption here.
Secondly, it must be open to all employees and not an event exclusive to management or directors.
If a business has multiple branches, it can be location-specific, but the invite cannot be restricted to certain staff members.
Finally, the cost per head must not exceed the £150 threshold. If the aggregated cost of a Christmas party works out to £151, the exemption is lost and the full amount may become taxable as a Benefit in Kind.
It is important for event organisers to consider this all-or-nothing approach to exemption. Pushing the boat out with tax savings in mind can lead to unwanted tax liabilities if the overall cost per head works out to be greater than £150.
Can you spread the exemption over multiple events?
Despite being labelled an ‘annual’ exemption, it doesn’t have to be allocated to just one yearly event.
HMRC allows you to hold multiple qualifying events over a year, provided the combined cost per head doesn’t exceed £150.
Surveys by Anna Money suggest that the average UK SME sets aside roughly £108 per employee for their festive celebrations, leaving an estimated £42 remaining allowance for other functions.
It is up to you to choose which events you want to be tax-free and you are not forced to put every event into the exemption.
Instead, you should calculate the cost per head for each event before deciding which to include, as one extra event could tip your company into taxable Benefit in Kind territory.
Speak to an accountant
Our accountants can confirm whether your event meets HMRC’s annual exemption rules, evaluating whether the cost per head falls within the £150 limit.
We can identify whether other events can also be covered in the exemption to optimise tax savings and help you keep a clear record of expenses throughout.
By taking advantage of the annual function exemption, you can raise the roof at your Christmas party while keeping costs tax efficient.
Planning your company Christmas party? Speak to our accountants for guidance on maximising tax efficiency.