Group of people with Santa hats on stood behind table of buffet food and clinking glasses. Christmas decorations in the background
Tinsel, Turkey, and Tax Relief – reminder about tax-efficient annual parties

The work Christmas party should be a fun event, giving staff the chance to get together and celebrate the holiday season. But it’s important to remember that such functions can potentially create a taxable benefit in kind. When planning your Christmas party, make sure you stay within the rules to avoid landing your staff with an unexpected tax bill in the New Year.

The basic conditions for a tax-free party are:

  • The party must be annual;
  • The event must be available to all employees; and
  • The cost per head must not exceed £150 (including VAT).

The ATT has urged the Government to update the £150 per head limit, which hasn’t changed since 2003. But let’s look at these rules as they currently stand in more detail.

The annual test

The requirement for the party to be annual – rather than a specific relief for a Christmas party – means that if your firm chooses to hold a regular summer function instead (or potentially as well as a Christmas party) then, provided the other tests are met, one or even both could potentially be tax-free for staff.

One-off celebrations – such as a party to mark an anniversary to celebrate 20 years of trading – do not qualify for this specific exemption.

The all-employees test

The requirement for the party to be open to all employees is modified if the employer has multiple sites, but it must be available to everyone at that location. Smaller parties grouped in other ways – such as by department – can be held if preferred, as long as all staff at that site have the opportunity to attend at least one of the events.

If the event is only for selected staff so that the general exemption cannot apply, then it might be worth considering if the trivial benefits rules might apply instead, where the average cost is £50/head or less. We’ll look at these in more detail next month.

The cost test

Finally, to establish if you are within the £150/head limit you need to consider the total cost of providing:

  • The party or function, and
  • Any transport or accommodation provided for those attending (including non-employees) and
  • Any related VAT on the above.

To establish the cost per head the total is divided by the number of people attending. Any non-employees, such as spouses or partners of employees, who attend can be included in the headcount.

Provided the cost per head comes to £150 or less, then the party will be exempt. If the cost is £150.01 per head or more, then the event will be a taxable benefit in kind for staff. The £150 is an exemption, not an allowance, and if it is exceeded, then the whole cost is taxable.

Where the cost exceeds £150 the benefit must be reported on a P11D for the attending employees. The employee’s benefit must also include the cost of any attending spouse/partner who is not an employee in their own right. The employer must also pay Class 1A NICs on the total benefit amount following the end of the tax year. Alternatively, the employer can bear all of the tax themselves by including the benefit in a PAYE Settlement Agreement.   

Multiple events

Where an employer holds more than one annual event, for example a Christmas party and a summer function, it is possible for all of them to be exempt provided that when the cost per head of each event is added together the total is £150 or less. For example, a Christmas party costing £75 per head together with a summer event of £50 per head, totals less than £150 per head, and both events would both be exempt.

If the employer also holds a third event for £45 per head in the autumn, the total for all three events would be £170 per head, which exceeds the £150 limit. The employer is permitted to allocate the exemption to maximise its benefit so in this case, the exemption should be allocated to the Christmas and summer party. As a result, only the autumn event would be taxable.

Tax relief for the employer

From the employer’s perspective, tax relief should be available on the costs of any party which falls within the exemption above.

VAT costs should also be recoverable for parties that only staff attend. If the partners of staff members are invited – or the business is unincorporated and the sole trader or partner attends – then VAT recovery needs to be restricted for non-staff members and business owners. This is complex, and HMRC have provided more guidance in the form of VAT Notice 700/65: Business entertainment.  

 

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.  

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