When you’re building up a business, the HMRC can seem like a Scrooge-like organisation – cold-hearted, uncaring and miserly. But as Christmas approaches, this is one time of year when the tax system does offer a little glimpse of warmth with the Christmas expense exemption.
This is takes the gift wrapped form of a tax exemption that HM Revenue and Customs (HMRC) provides to cover the allowable expenses of an annual Christmas event for your employees.
In basic terms, they provide a tax-free exemption of £150 per person, for everyone attending a Christmas do. But before you go investing in cases of champagne and party poppers, it really pays to properly understand exactly how the exemption works.
It’s an area where a growing business can easily get easily get caught out and land itself with the unwanted gift of a hefty tax bill.
So here’s how to stay safe and maximise the benefits and qualify for the Christmas expense exemption:
Make sure the event is annual
Although this tax exemption is mainly used to cover Christmas parties, the actual timing of the event is irrelevant. An annual summer barbecue is just as valid as a Christmas bash.
It means that one-off events, are not covered. A Christmas party triggered by a particular company milestone isn’t valid – unless it’s held each year. The exemption can, however, be applied to multiple events – as long as the total combined costs stays within that £150 per head cost limit.
Ensure it’s open to all employees
For an event to be valid for HMRC tax exemption, it needs to be made generally accessible to employees. So an exclusive event, with invites sent only to company directors, isn’t going to be exempt.
If a business has multiple sites, an annual Christmas party may be provided for each location. What’s important is that it’s made available to all staff on each site.
Stay within the £150 limit
Spend £150 per person, or less, on a Christmas do and everything is fine – it’s treated as a taxable perk. But if that amount creeps over to £151 – you lose any exemption.
This needs to be really carefully monitored as it’s an area where HMRC has a track-record of being extremely stringent. They instruct businesses to calculate overall event costs and then dividing by the number of attendees.
This means that the £150 limit has to cover everything relating to the event – that includes the transport expenses of getting people to and from a venue, as well as any overnight accommodation costs.
One particular trap many companies fall into is to provide a free bar, allowing overall costs to creep over the £150 limit. A spending ceiling that keeps costs safely within the exemption needs to be set.
So while there a few things to keep an eye on, the annual party exemption is one of the friendlier bits of legislation to stay the right side of.
Get it right and you can give your employees the kind of Christmas event that every growing business needs – thanking your team for their hard work and energising them for the challenges ahead.
Get it wrong and you can find yourself clobbered with a hefty tax bill. Go over that £150 limit and the whole amount suddenly becomes a taxable benefit – that means adding income tax and National Insurance on top of the costs.
Webexpenses provides a better way to manage employee expenses. Find out for yourself by requesting a free demo.
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