With a noticeable chill in the air and leaves turning darker, many businesses look to the winter months and begin to plan their Christmas party.
Coordinating the Christmas party, the staple of British workplace culture, can be very expensive, so any savings go a long way in boosting the party budget.
Luckily, company events can be completely tax-free under HMRC’s ‘annual function exemption,’ allowing employers to spend up to £150 per head, averaged across attendees.
However, there are a few important criteria that need to be satisfied if your company intends to benefit from this worthwhile tax exemption.
What is HMRC’s ‘annual function exemption’?
HMRC’s annual function exemption is a rule that permits employers to host social events without them being treated as a taxable Benefit in Kind.
With an allowance of up to £150 per person, employers won’t be charged any Income Tax or National Insurance liabilities for the event.
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 staff would rather have an office Olympics in the summer months or complete an escape room in spring, these are also completely viable for the tax exemption.
What qualifies an event for exemption?
For an event to receive the tax-free treatment, it must satisfy three criteria.
Non-repeatable events, such as workplace anniversaries or long service awards, will not qualify because they are not regular fixtures.
This is why many companies choose to allocate their exemption to the Christmas party, functioning as an obvious annual and recurring event.
As an exception, companies with multiple branches can offer location-specific parties, but the invitation must be open to the entire workforce.
If the aggregated cost of a Christmas party works out to anything over £150, the exemption is lost and the full amount may become taxable as a Benefit in Kind.
As the exemption isn’t tapered, organisers should consider this when planning company events.
It may be enticing to push the boat out with the prospect of a tax saving fleshing out the budget, but a price per head over the £150 threshold eliminates the tax-free status.
Is the exemption only applicable to certain events?
Despite being labelled an ‘annual’ exemption, it doesn’t have to be allocated to just one yearly event.
Under the rules, HMRC allows you to host multiple qualifying events over a year, provided the combined cost per head doesn’t exceed £150.
Research suggests that the average UK SME sets aside roughly £108 per employee for their Christmas celebrations, leaving an estimated £42 remaining allowance for other functions.
In practice, it is up to you to decide which events you want to be included in the exemption and you are not obliged to include every one.
It is smart practice to calculate the cost per head for each event and then decide which to include, as including too many could tip your company into taxable Benefit in Kind territory.
Speak to an accountant
Our accountants can assess 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, while helping you keep a clear record of expenses throughout.
Capitalising on the annual function exemption can help you and your staff live it up at the Christmas party, while keeping your costs tax efficient.
