Are Christmas parties an allowable expense for business tax purposes?
The general rule is that the cost of staff entertainment is tax-deductible, provided it is not incidental to entertaining others. If suppliers or customers are invited to attend as well, careful consideration must be given to how the costs are apportioned between staff entertainment and supplier/customer entertainment, as the latter is not tax-deductible.
The VAT recovery rules also differ for staff entertainment versus supplier/customer entertainment, so it is important to exercise caution in this area.
Annual Event – This is a recurring event, such as a Christmas party or a summer BBQ. It must be held on a regular, annual basis, rather than informal hospitality offered frequently to staff. This can also apply to online or virtual events!
Open to All Staff – While not all staff are required to attend, the event must be open to everyone and all employees must be invited. If your business has multiple office locations, you can host the event at one location, as long as it is made available to all employees.
Christmas Parties
This step-by-step guide from the team at Chart Accountancy will help you understand how to claim your Christmas party expenses, ensuring your festive holidays don’t turn into a financial headache.
Step 1: Understand HMRC Guidelines
HMRC offers an annual exemption for staff entertainment, which includes events like Christmas parties. To qualify for this exemption, businesses must meet the following criteria:
The Event Must Be Annual: The event should be a regular, recurring celebration, such as a Christmas or year-end party.
All Staff Must Be Invited: The event should be open to all employees, or at least to all employees at a specific location if your business operates across multiple sites.
The Cost Must Not Exceed £150 Per Person: This total includes all expenses, such as food, drink, entertainment, and transport. If the cost exceeds £150 per person, the entire amount becomes taxable.
In addition to the exemption for an annual function, employers can also take advantage of the trivial benefits rules to make seasonal gifts to staff such as a hamper or a voucher for food and drink.
Step 2: Calculate the Total Cost
To ensure your event qualifies for the exemption, calculate the total cost and divide it by the number of attendees. Include all expenses, such as:
Venue hire
Catering and drinks
Entertainment (e.g. live music)
Transport to and from the event
Decorations and party favors
For example, if your Christmas party costs £3,000 and you have 20 attendees, the cost per person is £150. If the total cost exceeds this amount, the exemption no longer applies, and the event will be treated as a taxable benefit.
Step 3: Check Eligibility for Plus-Ones
If your invitation includes employees’ partners or guests, HMRC allows you to include their costs within the £150 per person exemption. For instance, if an employee and their partner both attend, you can spend up to £300 (£150 per person) without triggering tax implications.
However, the £150 limit still applies per person, so make sure to plan your budget accordingly if you’re inviting plus-ones.
Step 4: Keep Records of Your Expenses
Accurate record-keeping is crucial to prove compliance with HMRC’s guidelines. Be sure to retain the following:
Invoices for venue hire, catering, and entertainment
Receipts for transport or any additional associated costs
A list of attendees to calculate the per-person cost
These records will be vital if HMRC requests supporting documentation for your claim.
Step 5: Know What’s Not Tax-Deductible
While the Christmas party itself may qualify for tax relief, certain related expenses are not covered by the exemption. For example:
Client Entertaining: Costs for entertaining clients or non-employees are not included in the exemption.
Non-Annual Events: One-off events that are not part of a regular, recurring tradition may not qualify for the exemption.
It’s important to distinguish staff entertainment costs from other business expenses to avoid confusion.
Step 6: Claim VAT Where Applicable
If your business is VAT-registered, you can reclaim VAT on Christmas party expenses, provided they are for staff only. VAT cannot be reclaimed on costs associated with guests or non-employees.
Step 7: Plan Ahead for Future Events
If your Christmas party doesn’t qualify this year due to exceeding the £150 per person limit, consider hosting multiple smaller events in the future. For example, a summer party and a Christmas party could each qualify for tax relief, as long as they meet the exemption criteria.
Trivial Benefits
Under the trivial benefits rules, employers can provide benefits costing up to £50 to an employee without tax consequences – provided that these benefits are intended as genuine gifts and not intended as a reward for their work. You can read our detailed blog on this if you Click Here.
Don’t miss out to claim both exemptions!
The two exemptions can work alongside each other, so employees can be invited to a Christmas party, allowable under the annual function exemption and also be given £50 of, say, gift vouchers, covered by the trivial benefits exemption.
However, it needs to be noted that for example the provision of a food voucher above £50 in the absence of the elements of a Christmas party will mean that the annual functions exemption will not be available.
Therefore, if the annual function exemption cannot be applied, an alternative approach could be for employers to keep the entire costs of the event within the trivial benefits rules.
At Chart Accountancy, we can help you navigate these rules, ensuring you maximise your tax benefits while staying fully compliant with HMRC regulations.
