December is almost here and this year Christmas party planning is starting early with most people missing out last year!. Christmas parties are always a great way to reward your employees for a year of hard work. It’s a great way for people to meet and greet their colleagues from different departments and teams, especially as so many companies are still not going into offices etc. all at the same time.
In this blog we look at whether your Christmas party expenses are tax deductible but also advise on the alternatives to Christmas parties.
Are Christmas party costs tax deductible?
HMRC provides tax incentives to limited companies (not sole traders) putting on a Christmas party for employees. Expenses for these parties will be exempt from tax and National Insurance if you adhere to certain guidelines that include:
- The party must be an annual event, such as a Christmas / New Year / Summer party.
- All employees in the organisation are invited to the party (not Shareholders).
- The cost of all these parties combined must not exceed £150 (including VAT) per head.
- All expenses, such as catering, venue booking, entertainment, decorations, etc. are included.
- Additionally, you can also claim an additional £150 per person for a plus one for each employee, providing they are a family member or partner.
Outside of this, staff entertainment is classed as a Benefit in Kind which employees are taxed on. Employers also must pay extra national insurance on the value of any perks they provide to their staff.
How much can I claim for a Xmas party?
As a company director, you are entitled to provide an annual party/event for yourself, any staff you employ, and your partner, and reclaim the costs against the company, if the cost per head does not exceed £150 (including VAT).The cost per head can include accommodation, transport, and food and drink.
Is a Christmas party an allowable expense?
Yes, it is if it meets the criteria above. But you must remember that this is an exemption (not an allowance). Why is that important? If your party costs even one penny or one pound over £150 per person, you won’t be able to claim the first £150 as a business expense. So you need to ensure that you don’t exceed the £150 threshold.
Also remember that the exemption covers the whole year. So if you have other parties in the year (summer party etc.) then the combined cost of all parties in a year can’t exceed £150 per person.
What alternatives can I claim for?
If your employees are still uncertain about meeting face to face post pandemic and don’t want to attend a party, then what are the alternatives to keep your employees motivated without a big tax liability?
Virtual Christmas party can I claim this as an allowable expense?
Again, on the surface the answer to this is yes. A virtual Christmas party could still be claimed as an allowable expense. However, you need to be clear on HMRC rules. All the same rules apply as above, but also you may need to be able to prove to HMRC who attended the virtual party (for it to qualify under the annual function exemption) and that it has been made available to everyone.
If your virtual party is a structured online entertainment event with a direct cost associated with it, this will help to demonstrate to HMRC that it qualifies.
Can employees provide their own food for a virtual Christmas party and claim it back?
Clearly with a virtual party, it’s difficult to provide employees with food and drink for the event. So many people are tempted to tell employees to buy their own and claim it back as an expense. We wouldn’t recommend this as it will be difficult to prove that these expenses were for the online event (should it be investigated).
What can I provide as an alternative to a Christmas party?
You could provide a gift or gift voucher to employees as an alternative, if a Christmas party isn’t a popular choice with your employees this year. This would be dealt with from a tax perspective under the trivial benefit rules. However, you’re only allowed to provide a gift up to the value of £50 (including VAT) without paying tax on it. The gift can’t be cash or a gift voucher you can exchange for cash.
So go on and party hard if your employees would like a party! Keep the above guidelines in mind to qualify for the tax-free allowance of £150 per head over a tax year for annual events such as a Christmas party. Be cautious to not cross the threshold otherwise it can cost you. If a gift is your alternative, then don’t exceed £50 including VAT.
Any questions? Schedule a call with one of our experts.
Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.
