The tax treatment of work Christmas parties
Limited companies can often claim the cost of staff Christmas parties as an allowable expense. That means you can celebrate with your employees and minimise your corporation tax bill all at once. Also, some functions may be treated as a taxable benefit for employees who attend. Here’s our guide to understanding the tax treatment of your staff Christmas party,
To understand the tax treatment of your staff Christmas party, you’ll need to consider the following:
How much did it cost?
Your Christmas party should not cost more than £150 per head, including VAT. Exceeding this threshold may impact any attending employees (including yourself). The entire cost of the event will be treated as a benefit-in-kind (BIK) and can result in them paying more income tax.
If this is the case, you must report the cost to HMRC and pay employers’ Class 1A NIC’s on the total. Suppose you spend £7,000 on a Christmas party for 40 people, meaning the cost per head is £175.
As this exceeds the £150 allowance, the event will count as a taxable benefit. So attending staff must pay income tax on the total £175, not just the £25 excess. You’ll need to report this on each employee’s P11D form.
Who did you invite?
Be careful when planning events exclusively for directors or a specific department in your company. Unless the party is made available for all employees, attendees must pay tax on the cost.
Entertaining non-employees
The £150-per-head rule applies to all attendees – not just staff members. That means if your employees’ spouses or partners attend they’ll get their own £150 limit. This exemption only applies to entertainment for employees and their partners or family members. That means any events you hold for clients will not qualify for corporation tax relief. You should also be cautious when inviting contractors or subcontractors to your work Christmas party, as this could affect their employment status.
Is it a recurring event?
Most costs associated with entertaining staff will qualify as a business expense – but don’t get caught out. Unless your party is a recurring annual event, it will typically attract a taxable benefit on any employees attending.
How many annual events do you hold?
Many businesses have more than one recurring event each year. So, if you hold a summer party and a Christmas party, you’ll need to split the £150-per-head limit. If the combined cost of these events exceeds £150, only one function will be exempt for tax purposes. As a result, any members of staff who attend the non-exempt event could face a higher income tax bill.
VAT
As mentioned above, you’ll need to include VAT when working out the cost-per-attendee.
Be aware that claiming a VAT refund may be complexed if partners and family members also attend the event.
Giving gifts to your employees
It’s not just annual events that are tax deductible; small gifts to employees are usually exempt. However, the gifts must meet certain conditions:
- The cost of the gift does not exceed £50. Spend any more than this, and the entire value of the gift will count as a taxable benefit.
- The benefit is not cash or a cash voucher. While non-cash vouchers and gift cards under £50 can be classed as trivial.
- Entitlement to the gift is not in the employee’s contract. This includes any salary sacrifice arrangements.
- The benefit is not rewarding a specific service. Certain gifts given to an employee in recognition of a particular service may not be tax-free. Different tax rules apply for long-service awards.
The rules also vary for limited companies privately owned by five or fewer individuals.
Any qualifying trivial benefits provided to directors of close companies and families are subject to an annual £300 cap.
What happens if I overspend?
Don’t panic; you may be able to set up a PAYE settlement agreement (PSA) with HMRC.
A PSA allows employers to pay tax on certain benefits on an employee’s behalf.
Helping you navigate the rules
As an employer, you’ll understand the importance of keeping your team’s spirits high. Employees who feel appreciated are also more likely to stay in your business longer.
If you’re planning a staff Christmas party or want to give the team with gifts, we are here to help you navigate the potential tax implications.