Could your Christmas party be tax-free? HMRC’s ‘annual function exemption’ explained
As the warm weather fades and the winter months begin to roll in, many businesses begin to organise their annual festive parties.
What is widely considered the hallmark of British workplace culture can also come at great cost to a business, particularly for companies located in major regional hubs.
Luckily, Christmas parties can be completely tax-free under HMRC’s ‘annual function exemption,’ allowing employers to spend up to £150 per head, averaged across attendees.
Nonetheless, there are a few important rules that need to be met if your company intends to benefit from this unique tax exemption.
What is HMRC’s ‘annual function exemption’?
Event organisers want to give staff the celebration they deserve without cutting corners, so any opportunities to boost the budget are often well received.
HMRC’s annual function exemption does just that, permitting employers to host social events without them being treated as a taxable Benefit in Kind.
With an allowance of up to £150 per person, averaged out across total event expenses, employers won’t be charged Income Tax or National Insurance.
As it is an exemption intended for an ‘annual function,’ it is designed to apply to recurring events hosted by employers for their employees.
However, the exemption does not exist strictly for Christmas parties.
If staff would rather have an office Olympics in the summer months or complete an escape room in autumn, these are also qualifying events for exemption.
What qualifies an event for exemption?
For an event to receive the tax-free treatment, it must satisfy three criteria.
- The event needs to be once a year or intended to recur annually
Events that don’t repeat, like company anniversaries and long service awards, will not qualify because they are not regular fixtures.
The Christmas party is an obvious example of an annual, recurring event, which is why many employers choose to allocate their exemption here.
- It must be open to all employees, not an event exclusive to management or directors
Where events are organised, the invite must be open to all members of staff to attend.
As an exception, companies with multiple branches can offer location-specific parties, but the invitation must be open to the entire workforce.
- The cost per head must not exceed the £150 mark
If the average cost of a Christmas party equals an amount over £150, the exemption is completely lost and the full expenditure may become taxable as a Benefit in Kind.
The exemption isn’t tapered, so tax is either paid in full or not at all.
While organisers may be inclined to spend more if they believe costs will be spared through tax savings, a price per head over £150 can eliminate the tax-free status in its entirety.
Is the exemption only applicable to certain events?
The label ‘annual exemption’ may leave many to believe it only applies to one yearly party. However, this is not the case.
Under the rules, HMRC allows you to host multiple qualifying events over a year, provided the combined cost per head doesn’t exceed £150.
It is up to the business to decide which events will be included in the tax exemption. There is no obligation to include each and every corporate function.
When deciding which events will be included, it is advisable to calculate whether the cumulative cost per head will tip your company into taxable Benefit in Kind territory.
Speak to an accountant
Our specialists can assess whether your Christmas party falls within HMRC’s annual exemption rules, calculating 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 party costs.
Making the most of the annual function exemption can help you and your staff push the boat out at the Christmas party, while keeping costs tax efficient.
Currently planning your Christmas party? Speak to our accountants for guidance on how to implement the annual function exemption.
