Office Christmas parties are tax free... just not at HMRC
Updated: Dec 10, 2020
In the spirit of seasonal cheer, we remind readers that HMRC has a festive loophole that means businesses pay no tax on corporate Christmas parties, providing that the cost “does not exceed £150 per head”. The exemption also applies to “similar annual functions” such as summer barbecues.
The cost of the staff function can be treated as 'Staff Welfare', as if forms part of staff costs. If you are combining your function with customer entertainment then you will need to split the cost between Entertaining and Staff Welfare as client entertaining is not a tax deductible cost for Income and Corporation Tax.
The exemption is available if the function is provided for employees and:
is available to employees generally or
is available to employees generally at one location, where the employer has more than one location.
A staff function qualifies as a tax-free benefit for the employees providing that you meet the following conditions:
The total cost must not exceed £150 per head, per year.
£150 includes VAT together with any extra costs such as transport and accommodation.
The £150 is a limit and not an allowance: if the cost is £151, the whole benefit is taxable.
The event must be primarily for entertaining staff.
The event must be open to all staff (in that location, if you have several branches or departments).
The event is not just to be for directors, unless all your staff are directors.
The cost of the whole event is an allowable expense for your business.
You can claim back input VAT but this may be restricted where you are also entertaining customers.
One interesting point is can a sole director takes him or herself out for a Christmas dinner and drinks tax free? Does this mean that they can spend up to £150 per head without incurring a benefit in kind? Probably!
It could be argued that the cost is not for the benefit of the business's trade. However, we believe that it is still in the best interest of the company's trade to have a happy work force, even if just one director. We all need a lift and a morale boost in the dark and winter months of December.
The £150 is not tax free allowance with the surplus taxable; if the cost if more than £150 per head then the whole amount is taxable. So, if you run a summer go-karting event that costs £50 per head and then have a Christmas party that costs £110 per head, then as the aggregate if over £150 then one of the functions will be taxable on the employee. The employer can chose whichever event best utilises the £150 exemption. In this case it would be better to apply the £150 exemption to the Christmas party and the go-karting event would therefore be fully taxable. The actual order of the events is irrelevant so long as they are in the same tax year.
The cost of the function includes VAT, room hire, food and drink, function entertainment, transport and/or overnight accommodation if these are provided to enable employees to attend. You need to divide the total cost of each function by the total number of people (including non-employees) who attend in order to arrive at the cost per head. So, if the cost per head is £80 and each employee takes their partner then this is fully allowable. The cost of the employee's partner is not aggregated on to the employee resulting in the whole cost of £160 being taxable on the employee. However, the function must be primarily for entertaining staff.
You should record the numbers attending any event so that the cost per head can be calculated.
Should the £150 cost be exceeded then the employer would be expected to prepare a Form P11D for each employee present. The employer would then pay 13.8% Class 1A National Insurance before 19 July after the end of the tax year and the employee income tax on the amount e.g. at 20% or 40% either through their tax code or through their Self Assessment Tax Return each year. Not the sort of New Year’s present that an employee needs after their Christmas party a week or two before!
Alternatively, the employer can agree to pay the tax due by the employee through a PAYE Settlement Agreement (PSA).
Input VAT is fully reclaimable on the cost of the function as it is 'staff welfare' and not regarded by HMRC as 'client entertaining'. HMRC may argue that if you are an owner-manager and have a one-man party then you do not qualify. Can you actually have a party with just yourself? Actually, the £150 is an 'annual party or similar functions' allowance; not a 'party allowance' so if you wish to have a quiet meal and a drink that should be okay.
Similarly, if the function is mainly for directors (and so excluding other staff) then you cannot reclaim input VAT.
If you are also entertaining UK clients as well as staff then you have to disallow a proportion of input VAT based on the ratio of number of clients to staff.
Sadly, HMRC doesn’t savour any subsidised sausage-rolls itself. The Scrooge-like government body says that not a penny of its budget will be spent on rewarding employees with a few Proseccos around the photocopiers. “HMRC does not hold any Christmas parties for staff,” says a source. “We would never spend public funds on anything like that.”
With the Coronavirus pandemic, some where concerned that providing a party box to staff working and ‘partying’ from home would not be eligible for the usual tax exemption that applies for annual parties.
HMRC confirmed that virtual parties fall within the scope of the exemption. Therefore, if you hold an annual Christmas party online , you will be able to provide food and drink to employees and take full advantage of the £150 per head tax concession, as long as the usual conditions are complied with.
HMRC stated that having considered the scope of the legislation, in section 264 of ITEPA 2003 for the 'annual parties exemption', that they were pleased to confirm that the exemption will apply to the costs associated with virtual parties in the same way that it would for traditionally held parties.