Although HMRC isn’t exactly notorious for helping you out, it does throw a bone your way every now and again in the form of a Christmas party allowance, even if that may be once a year. Tax legislation doesn’t specifically include an allowance for an employer to provide a Christmas party for employees. HMRC does, however, allow limited tax relief against the cost of holding a function for their employees, but of course, providing certain conditions are met. As with any tax situation, there are aspects you need to watch out for when carousing.
The Christmas Party Allowance
An annual social gathering such as a “Christmas Party” will be considered tax-free if the total annual cost per head exceeds no more than £150, the event is primarily for entertaining staff, and the event is open to all employees or to those at a particular location. So to clarify, A Christmas Party will qualify as a tax-free benefit if the 3 following conditions are met:
- The total cost must not exceed £150 per head, per year.
- The event is primarily for entertaining staff
- The event is open to employees generally or to those at a particular location (if the employer has numerous branches or departments.
Broadly, a social event is considered tax-deductible, as long as it is not entertaining others. For example, if you were to invite your customers & suppliers to also attend the gathering, you would need to take extra care in apportioning the costs relating to the staff entertainment and the customer entertainment. This is due to only the employee aspect of the apportioning being tax allowable.
How The Allowance Works
Make no mistake, when under the effort of keeping your Christmas parties within the tax allowance, the total cost of £150 per head, per year, is including VAT. The cost per head is the complete total cost of the event from start to finish.
This includes any transport to and from the event, food & drink, and any accommodation. If this total is exceeded by even just a penny, the whole amount must be reported to HMRC. It is also wise to note that the £150 Christmas party allowance is an annual threshold, and is not necessarily deemed to be used in 1 fell swoop.
You may have 3 parties, for example, spread over the course of the year, costing £50 per head for each event. Remember, the Christmas party tax is a LIMIT, not an ALLOWANCE, meaning when we state the whole amount must be reported to HMRC, we mean all of it, the entire cost then becomes a benefit, not just the excess over the limit.
Regardless of how many events you hold per year, which one you allocate to the £150 limit is completely up to you. There is no limit to the amount an employer can spend on an annual function.
If the total cost exceeds the annual limit the cost will still be an allowable deduction, but the employees will have a liability to pay Tax and National Insurances Contributions (NIC’s) on the benefit in kind.
Is The Christmas Party Allowance Primarily for Staff?
As we have mentioned the general rule for annual functions is that the event is primarily for staff, and not customers and/or suppliers. If the employer’s customers and/or suppliers attend the event the costs must be correctly apportioned to both employees and non-employees in order to keep your Christmas party tax-free.
As one is tax allowable and the other is not. Again, if your business wishes to hold multiple functions and events across the year these total costs must still not exceed the annual limit regardless of who is attending (as long as they’re primarily for staff) and the limit must be divided by the number of events taken place to ensure the limit has not been exceeded.
The Allowance Must be Open to all Staff
In no way shape or form do all of your staff have to attend the events, however, they must be open to all employees. If for example, you offer the party to certain members of staff it will be taxable on those employees as a benefit.
If the business holds various branches or departments the party can be dedicated and open to a specific branch, but again, must be open to all members of staff working at that particular location.
What Is Meant by per Head?
This can often cause a lot of confusion and problems to employers, as although we would think of the term “per head” as each individual employee, it actually accounts for any family members or partners the member of staff arrives with.
Of course, this only applies if the Christmas Party is extended to guests, otherwise you have nothing to worry about. As we mentioned towards the start of the article, the total cost per head is to include transport, accommodation and any other expenses for the employee, but this also applies to any guests that are alongside.
To find the total cost per head, you must count up all guests that are arriving including employees’ plus ones, partners, family etc. and divide the cost of the event by this number.
For example, if an event totalled £3,250, had 15 employees, and 11 guests (26 in total). To work out the cost per head you must divide 3,250 by 26 = £125 per head. Make sure you take this into account when planning your “Christmas dos’”.
What about online/virtual parties?
With the world around us changing rapidly over the last couple of years, working from home and communicating via online means has become the norm for some companies. In instances like these, businesses may choose to do virtual office parties for events such as Christmas.
The same rules apply throughout the year even if your parties are hosting online, such as using a platform like Zoom.
Can I reclaim VAT on party expenses?
You can reclaim the input VAT on party expenses if directors and partners attend a staff party alongside their employees. HMRC states: “We accept that the tax is input tax and is not blocked from recovery”. Albeit, you cannot claim the VAT on party expenses if only directors and their partners attend the event, HMRC’s stance on this is as follows: “This is because the goods or services are not used for a business purpose”.
Can The Christmas Party Allowance be Used for Anything Else?
Although this limit is actioned on annual events, these must be regular occurrences such as a Christmas Party and not one-off events such as a company anniversary or “birthday”.