Is your Christmas party exempt from tax?

Christmas Party

There's a chill in the air, festive foods have started appearing on supermarket shelves, and for some, thoughts are already turning to holiday plans and gift shopping.

 

Even if you're not counting down the days, if your business employs staff it's likely you've given some thought to planning this year's Christmas party.

 

 

Throwing a staff party is a great way to end the year and reward hard work - and it might also be tax-exempt, if your business is a limited company and if your event meets certain criteria set out by HMRC. 

 

This exemption could apply not only to your Christmas party, but also to any annual event you hold for your staff.

 

Qualifying Conditions 

Less than £150 per person 

To qualify for the exemption, the cost of your party must come to less than £150 a head. That takes into account everyone who attends, including non-employees.

 

It is important to remember that this is an exemption, not an allowance. If the cost of the event comes to £151 per person, for example, the full amount will be chargeable, not just the £1 over the limit. 

 

Held annually 

The event has to be something that happens once a year, so one-off events don't qualify.

 

HMRC's technical guidance says that an annual event must be "something that happens once a year on a recurring basis", so a party for your business's 20th anniversary or to celebrate winning a new contract won't be exempt. 

 

Open to everyone 

To qualify, the party has to be available to every employee in your company. It won't qualify if you hold a directors-only dinner or a social event for one department, for example.

 

If your business operates in multiple locations, or if your workforce is organised into distinct departments, you can hold separate annual parties. As long as everyone has the option to attend from somewhere, each party could be exempt. 

 

Holding multiple events 

You can use the exemption for multiple events in the year as long as they don't exceed the £150 limit. 

 

So if you throw a Christmas party that costs £10,000 and a summer party costing £4,000 and 100 people attend each of them, the cost would come to £140 per person, making both events exempt. 

 

But if your summer party costs £6,000 instead, the combined cost would come to £160 per person - meaning your events wouldn't qualify. 

 

In this instance, you could still use the exemption for one of the events, but you'll be charged for the other. 

 

What if the event doesn't qualify?

If you provide any events that don't meet these conditions, you'll need to report them on each employee's P11D and pay Class 1A National Insurance Contributions on the full cost of the event. 

 

Event for events that are exempt, make sure you keep detailed records in case HMRC needs to check what you've spent.  

 

Reclaiming VAT

If your company is VAT registered you'll also be able to reclaim the VAT you paid on the event, as it comes under the category of staff welfare, which has a clear business purpose.

 

However, you won't be able to reclaim VAT spent on entertaining non-employees.