While we are still in October, with Halloween and bonfire night on the horizon, you may have already started thinking about your annual Christmas party. As venues get booked it's important to be quick to ensure your employees get the best of what's out there however one thing you also need to keep in mind is the tax rules when it comes to work Christmas party expenses.
What legislation says about Christmas party expenses?
HMRC provides tax relief to limited companies for the cost of holding an annual party. This means if you decide to throw a Christmas party for your employees you can deduct this as an expense, which reduces your company profit, resulting in less corporation tax paid.
There are restrictions when it comes to expensing Christmas parties. HMRC have stated that in order to offset the cost of your annual event against profits 3 conditions must be met.
- The cost per head must be £150 incl VAT per or less
- the event must be available to all employees to attend
- the event must be annual by nature - this can be a Christmas or summer event or both
To work out your cost per head you would simply add up all the expenses incurred and divide by the number of attendees. Attendees include employees as well as any family or guests invited as a plus one. The £150 limit set by HMRC is not an allowance, meaning that if your cost per head exceeds £150, the whole amount cannot be used as a taxable expense and will be treated as a benefit in kind.
What is an annual event?
HMRC defined an annual event as "something that happens once a year on a recurring basis". This means that a Christmas party or a summer party which is done every year, is tax deductible assuming it meets the other conditions. Whereas a party to celebrate a company milestone such as an IPO won't qualify for the tax deduction.
Holding two annual events
The £150 cost per head can be split between two annual functions. For example, you may choose to have an event in the summer costing £40 per head and an event in the winter costing £60, the combined cost is £100 for the year. Both events can be deducted for corporation tax purposes.
If your cost for two annual events amounts to £170 for the year. A summer event costing £100 per head and a Christmas party costing £70 per head, only one event will be exempt and the company can choose which would be most efficient to exempt. This however means that if the company chooses for the summer event to be exempt, anyone attending the staff Christmas party will be charged with the benefit.
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Directors-only Christmas party
A party which is only open to directors of the company or a specific team of employees won't be exempt for tax purposes. The cost of the event will be chargeable to employees attending as a benefit in kind.
Benefit in kind
A benefit in kind is a good or a service received by the employee which the employee can personally use and it isn't incurred wholly and exclusively for the purpose of the business. A common trivial benefit can be the use of a company car or medical insurance.
If the cost of your office Christmas party exceeds £150 per head, you will have to report the cost to HMRC and pay Class 1A National Insurance for the full cost of the event. Reporting to HMRC is done via a P11D form which must be completed and sent by the 6th of July following the tax year the cost was incurred. This will also affect the employee's income tax.
Christmas gifts to employees
You may wish to give gifts to your employees around the festive period. This not only boosts morale as it makes employees feel appreciated but you can also deduct trivial gifts as business expenses as long as it complies with HMRC rules.
HMRC defined trivial gifts as:
- costing £50 or less
- it isn’t cash or a cash voucher
- it isn’t a reward for work done or performance
- it isn’t in a term in the employment agreement
If the benefit is provided to a director or other office holder of a close company, there is a cap of £300 for the tax year. Close companies are defined as privately owned and controlled and done so by five or fewer individual participators.
Is your office remote?
You may have a remote office or all your employees are spread out across the country and planning an in-person Christmas party is not realistic. In this case, you may want to host a virtual event. The rules for virtual parties are exactly the same. It must be available to all employees, not exceeding £150 per head and be an annual event by nature.
Work Christmas parties are a fun way to celebrate the holiday season and end of the year and connect with your colleagues. However, as you enjoy the festivities, be aware of the annual event expense rules.