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 the cost per head “does not exceed £150 per head”. The exemption also applies to “similar annual functions” such as summer barbecues.
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.
One point that I have never found an answer to is this. What happens if a sole shareholder-director takes him or herself out for a Christmas dinner and drinks; does this mean that they can spend up to £150; or maybe take their partner out for a summer event and keep the total price at less than £75 each. The partner would be a non-employee, so their cost would be added to their employee-partner’s costs per head. The whole cost being less than £150, as staff entertaining, unlike client entertaining, would be tax deductible.
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 and the cost of 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 the total cost per employee would be £160; resulting in the whole amount being taxable on the employee.
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)
Sadly, HMRC doesn’t savour any subsidised sausage-rolls itself. The Scrooge-like government body says that not a penny of this year’s £3.4bn 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.”