In our previous Top Tax Tips blog post we discussed how you can gain tax-efficiency by utilising the Trivial Benefits exemption. An extension to the Trivial Benefits exemption is the annual staff party or other social function exemption that you can make use of to allow your staff to celebrate your successes and build bonds with each other whilst getting tax-relief at the same time!
So how can you save tax on your annual party or event?
As an employer you can take advantage of the annual staff party or other social function exemption which will enable you to incur costs of up to £150 per head for each of your employees (including directors), per tax year. This is great for Christmas parties or any other annual celebratory event you may want to consider for your team.
Under this exemption, a company is allowed to deduct the expense in full when calculating corporation tax and is can also reclaim the VAT where a business is VAT registered.
It is a great way to save tax, whilst rewarding directors and employees for their hard work.
What qualifies as an annual event or social function?
The event must be an ‘annual’ event
It must be open to all employees and directors (and cannot be restricted to select employees)
The cost of the event (or cumulative cost of all events if more than one event is held) is less than £150 per person (including VAT).
Providing the spend of £150 per person (including VAT) is not exceeded, there can be more than one annual event. So, if there were 3 annual events, a spend of £50 per head per event would still qualify for the exemption.
Where the cost of an event (or the cumulative cost of all events if more than one) comes to more than £150 per head, then the whole benefit is taxable on the employee, therefore you need to be careful and ensure the cumulative cost does not exceed £150 per head as this may have an unintended tax charge on the employee!
If cumulative spend on all events comes to more than £150 per employee, then some of the events that take the spend over £150 per head will need to be disallowed when calculating the corporation tax liability as they will not get the tax relief. However, the disallowed events are still taxable on the employees, so this does need to be managed carefully.
What other annual events can you claim this exemption in?
Common examples of annual events or other social functions could include;
- A Christmas party
- A summer barbecue
- An annual getaway
- A team building day
- A staff meal at Easter
According to HMRC guidance, the general meaning of “annual” is something that happens once a year on a recurring basis.
How does this work in practice?
If your company has employees, you may already pay for a Christmas party or meal. If this is the case, you may already be taking advantage of this exemption. If you have 6 employees (including directors), and the total spend on a Christmas meal was say £240 (inc VAT), this works out to a spend of £40 per head. Under this exemption, there is another £110 (£150 less £40) which can be used for other annual events, tax efficiently.
So, you could pay for other events, if they meet the criteria listed above and cost up to a maximum of £150 per head. You may wish to consider a team building day, or additional staff meals to maximise this exemption.
How does this work when my company only has directors?
Exactly the same! In fact, it could work out even better for you as you are likely incurring personal expenditure each year, therefore with a bit of careful planning, you could actually be putting this through the company, saving a fair amount of tax!
How much tax could I save?
For simplicity, let’s assume a company which has two directors only, a husband and wife. We will also assume the maximum exemption is utilised, so £150 per director – or £300 in total.
The company can claim this as an expense in their corporation tax return, giving a tax saving in the company of £57 (£300 x 19%). If the company is VAT registered, this saving is even greater as the VAT can also be reclaimed.
The main benefit, however, is that this is being paid for by the company, and not through your personal income.
The annual event allowance is a tax efficient way to reward directors and employees.
If you are unsure how to take advantage of this exemption, please speak to us and we will be happy to assist.