HMRC Christmas Party Exemption: What Your Company Needs to Know

It may only be September, but supermarkets already have mince pies on sale. As far as we’re concerned, that means it’s ok to mention the “C” word. On that note, a common question we get asked about the holiday season is around HMRC rules on the Christmas party exemption and how it affects your company’s festive celebrations.

Understanding these tax rules is important for businesses looking to reward their employees without incurring unexpected costs. The HMRC Christmas party exemption sets out specific guidelines for tax-exempt entertainment expenses, including the popular company Christmas party.

This article will help you make the most of your Christmas party exemption while staying compliant with HMRC regulations.

The Basics of HMRC’s Christmas Party Tax Exemption

HMRC offers tax relief to limited companies for the cost of holding an annual party. This means you can deduct the expense of your Christmas party, reducing your company profit and resulting in less corporation tax. However, to offset the cost against profits, you must meet three conditions:

1. The cost per head must be £150 or less, including VAT.
2. The event must be available to all employees.
3. The event must be annual by nature, such as a Christmas or summer event.

To calculate the cost per head, add up all expenses and divide by the number of attendees, including employees and their guests. It’s crucial to note that the £150 limit is not an allowance. If your cost per head exceeds £150, the entire amount becomes a taxable expense and is treated as a benefit in kind. HMRC defines an annual event as something that happens once a year on a recurring basis.

Breaking Down the £150 Per Head Exemption

You need to understand the £150 per head exemption to make the most of your company Christmas party. This amount includes VAT and covers various expenses such as food, drink, transport, and accommodation. As mentioned above, it’s crucial to note that this is an exemption, not an allowance.

The event must be open to all staff, with most attendees being employees. Directors can claim an additional £150 for a plus one, provided they’re a spouse or family member.

Remember, the £150 exemption applies throughout the year. If you host multiple annual events, like a summer party, the combined cost per person for all functions must not surpass £150. Exceeding this limit makes the entire amount subject to tax and National Insurance.

Navigating Multiple Annual Events

You can use the £150 exemption for more than one event throughout the year. For instance, if you host a summer party costing £40 per head and a winter event at £60 per head, the combined cost of £100 falls within the limit. Both events can be deducted for corporation tax purposes.

However, if your total cost exceeds £150, you’ll need to choose which event to exempt. For example, if a summer event costs £100 per head and a Christmas party £70 per head, only one can be exempt. If you choose the summer event, anyone attending the Christmas party will be charged with the benefit.

Remember, each event must meet the qualification criteria. They should be open to all employees, occur annually, and not be provided under salary sacrifice arrangements. Keep detailed cost breakdowns and consider the nature of each event carefully, as HMRC may request this information.

Conclusion

The HMRC Christmas party exemption is a fantastic way to reward staff whilst also helping to reduce corporation tax. It’s important however to be aware of the rules or you could find yourself unable to take advantage of the exemption.

If you would like more information or have any questions, please get in touch. We’d love to help.