Your Guide to Tax Rules for Staff Christmas Parties

Published on December 01, 2022

Employee Gifts

Christmas

Are you gearing up for the Staff Christmas Party? Learn the essential rules to keep the party costs tax-deductible.

With the festive season approaching, it's crucial to understand what qualifies as a Staff Christmas Party and how to ensure the costs are deductible for corporation tax while keeping your employees free from tax and National Insurance liabilities.

Is a Christmas Party Tax-Deductible for the Business?

Typically, the entertaining of staff and their partners is a tax-deductible expense for the business. However, entertaining non-staff like customers and suppliers is not considered tax-deductible.

For mixed events where staff, partners, and non-staff attend, such as customers, costs need to be apportioned accordingly.

Is a Christmas Party Taxable as a Staff Benefit?

No, a Christmas party can be tax-free, but it must meet these criteria:

  1. It must be an annual event or social function, e.g., a Christmas party or summer BBQ.
  2. It should be open and available to all staff.
  3. The cost should not exceed £150 per head (including VAT).

Defining an Annual Event

An annual event is something that occurs once a year or is expected to happen yearly. For example, the staff Christmas party is an annual tradition for most businesses. Other examples include a summer BBQ or an annual day out.

What Doesn't Qualify as an Annual Event?

Events that don't occur annually, such as retirement parties, long-service awards, or one-time team-building events, are not considered annual events.

Should All Staff Attend the Christmas Party?

To qualify as a non-taxable benefit, the Christmas party must be open to all staff, even if it's split across different locations or departments for larger companies. What doesn't qualify is a Christmas party exclusive to company directors, excluding regular employees.

Calculating the £150 Per Head

To ensure the Christmas party remains a non-taxable benefit, the cost should not exceed £150 per head. Calculate it by summing up the total event cost and dividing it by the number of attendees, which includes staff, partners, and anyone else present at the event.

Expenses Included in the £150 Per Head Calculation

Simply put, all costs count. This means everything from accommodation and travel to food, drinks, and entertainment. Even VAT costs are included if the business pays for them.

Is the £150 Per Head an Allowance?

No, it's not an allowance. If the per-head calculation exceeds £150, the entire Christmas party cost is considered taxable. For instance, if the event costs £160 per head, the full amount becomes a taxable benefit.

If the event includes staff and their partners, the taxable benefit, in this example, would be £320, with the employee responsible for any tax.

What Happens with 2 Annual Events?

It's vital to note that the £150 per head applies for the entire year, not per event. The same rules of qualification need to be met for both parties: annual event, open to all staff, and a cost below £150 per head.

Scenario 1: A business hosts both a Christmas party and a summer BBQ for all staff, and these events happen annually. The Christmas party costs £100 per head, and the summer BBQ costs £40 per head. In this case, the total annual cost per head does not exceed £150, making both events non-taxable benefits for staff.

Scenario 2: If the BBQ costs £60 per head, totaling £160 per head, the business can choose which event to treat as exempt and which to declare as a taxable benefit. In this scenario, the summer BBQ becomes a taxable benefit.

Can Staff Contribute to Reduce Per-Head Costs?

Unfortunately, staff contributions won't affect the per-head cost. If a staff Christmas party costs £160 per head, it's still considered a taxable benefit, even if staff contribute, say, £20.

Are There Reporting Obligations?

If the costs exceed the £150 per head threshold, your company must report a benefit for each staff member. There are various reporting methods, with the P11d being the most common. Both the employee and employer will be subject to additional taxes.

Exempt Staff Christmas Parties and Reporting

For annual events that are exempt, there's no need to report them. Businesses must simply maintain records that demonstrate the exemption, in case they're requested later.

Where to Find More Information

To learn more about staff Christmas parties from HMRC, you can explore the following webpages:

Are Christmas Gifts to Staff Taxable?

In a nutshell, gifts to employees that are under £50 qualify as trivial benefits and remain tax-free.