As an employer, Christmas is the perfect opportunity to show your employees some appreciation for the hard work they’ve put in throughout the year. Christmas party season is in full swing, and you may be looking to host a company party of your own. What if we told you that you could do that tax free? Let us give you the information you need to keep the tax man away this festive season.
The rules for what constitutes a tax exempt company party are as follows:
- It must be an annual event
- It must be made available to all employees (or all employees at one location if the business has different locations)
- The cost must not exceed £150 per head (inclusive of VAT)
Exemption NOT allowance
The £150 per head limit is an exemption amount, it is NOT an allowance. This means that if your party averages a cost of £150 or less per head then the whole cost of the party is exempt from tax. However, if the average cost per head is £151 or more then the entire cost of the party is subject to tax, and not just the £1 per head excess amount.
As a company you may choose to host more than one annual staff event in a year (for example a Summer BBQ and a Christmas party). If the aggregate per head cost of both events is less than £150 then the entire cost of both events will be exempt from tax. If however the combined cost exceeds the £150 per head limit then the exemption can only be used by one event (for tax efficiency you should use the exemption on the event that has the highest cost per head which still doesn’t exceed £150).
ABC Limited puts on a Summer BBQ at a cost of £80 per head in August. In December they then have a Christmas party at a cost of £110 per head.
The aggregate per head cost of the parties is £190. This exceeds the £150 exemption limit.
In this example we would recommend that ABC Limited claim exemption for the cost of the Christmas party, and then pay the tax due on the costs of the Summer BBQ.
The party must be made available to all employees in order to qualify for tax exemption. According to HMRC guidance BIM45033 the definition of “employees” is extended to include retired members of staff and the partners of existing and past employees.
As an added extra bonus, VAT on staff entertaining is recoverable against the company output tax. This means that as well as claiming a tax free exemption on the cost of the party, you can also reclaim the cost of the VAT on your VAT return.
Please note that the definition of “staff” for VAT purposes DOES NOT include partners of existing staff or former employees. Therefore if these people are invited to your party then you will need to disallow the VAT on a proportionate basis.
We are hoping that you can enjoy your Christmas party much better now knowing that the taxman won’t penalise you for it. So all that’s left to say is enjoy, drink responsibly, and be safe!