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Spondoo Accounting
Call for Assistance: 02033 259 341
Spondoo Accounting

Your Christmas Party Tax Exemption - inviting friends and family

April 25, 2022

To help you spread the Christmas cheer to your employees, HMRC provides limited company directors with tax incentives on the annual Christmas party! Although tax laws do not specifically address an allowance for an employer providing a Christmas party for employees, HMRC allows limited tax relief against the cost of holding a function for your employees – provided certain conditions are met. 

Annual Christmas party allowance rules 

Like all expenses it should be wholly and exclusively for business purposes, Christmas party expenses must follow the following rules for them to be exempt from tax and National Insurance: 

  • The party must be an annual function – like a yearly summer party or Christmas party. It should not be a one-off function. 
  • You must hold an event to reclaim the costs.  
  • The event must be open to all company staff – and majorly attended by employees.  
  • Shareholders are not included in the exemption if they are neither employees nor directors.  
  • The party cannot cost more than £150 per person (including VAT). The cost per head can include food and drink, transport and overnight accommodation and the cost of the party is fully inclusive of everything from start to finish. To calculate the cost per head, divide the total cost of the function by the total number of people (including non-employees) who attend. 
  • An additional £150 per head can be claimed for a plus one for each employee – but the plus one must be either a partner or family member. 

Is a Christmas party an exemption or an allowance? 

It is important to remember that Christmas party costs are considered an exemption and not an allowance. Therefore, party costs should not exceed this £150 per person threshold provided by HMRC. Should your party exceed this amount per person, the entire amount (including the initial £150)  becomes liable to tax and National Insurance – and must be recorded on the your  PAYE Settlement Agreement (PSA).  

The £150 cost per person exemption spans the whole year. If you hold other staff annual events (say summer party) the combined cost (per person) of all parties in a single year cannot exceed £150. 

What of a sole director? 

A sole director can claim a Christmas party of one (or two if joined by a spouse or family member) – if the party meets the stipulated HMRC rules. However, it is crucial to talk to your accountant for guidance beforehand – so as not to fall into tax and National Insurance pitfalls. 

Is a virtual Christmas party an allowable exemption? 

In principle – YES, a virtual Christmas party is an allowable exemption. However, aside from the stipulated rules, you must prove to HMRC who attended the virtual party for it to qualify under the annual function exemption. 

Being a virtual party, it can become hard to provide meals and drinks to your employees with your £150 per person quota. It is advisable that you not provide your employees with the £150 and ask them to reclaim their purchases as an expense – because it could be hard to prove that the individual Christmas expenses were for one organised event – in case of an HMRC investigation or audit. 

Our suggestion would be to buy and send a “Christmas party hamper” to your employees to enjoy during the party instead. However, if you go for a Christmas hamper, you must not forget to organise an event – because a hamper without a party does not qualify for the exemption. If you wish to send out a gift to everyone without the organised event, you could do this under existing trivial benefit rules. 

How to recover Christmas party expenses 

To recover your Christmas party expenses, record your party costs as a tax-deductible expense when computing your taxable profits. Assuming you meet the conditions, it will reduce the corporation tax you will pay at the end of the tax year. The party will also be exempt from tax and National Insurance. 

Claiming VAT expenses for the Christmas party 

If you wish to reclaim VAT on your Christmas costs, remember: 

Claimable 

Not Claimable 

You can reclaim the input VAT on party expenses if directors attend the Christmas party alongside their employees.  

HMRC: “We accept that the tax is input tax and is not blocked from recovery”. 

You cannot claim the VAT on Christmas party expenses if only a director and their partners attend the event. 

 HMRC: “This is because the goods or services are not used for a business purpose”. 

 

Further guidance 

It is crucial to remember: 

  • This allowance is available to limited companies and not sole traders.  
  • If you hold more than one annual party in a year, you can split your £150 exemption over several events. For example, if you had three allowable events: £50 for the first event, £50 for the second event and the final £50 for the Christmas party. 
  • You can read more about annual parties and other social functions on the HMRC website 
  • You can read our article on Trivial Benefits – to understand HMRC rules on gifts to employees. 

Contact us if you need help with festive gifts or parties and wish to avoid a festive tax! 

 

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Information provided on the site is merely guidance that may change in line with UK law and regulations. Users must not consider this to be financial advice or their sole resource when making any financial decision. Spondoo is a trading name for Accounting SQL Limited, authorised & license accounting firm under the Institute of Financial Accountants.

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