Are company Christmas parties tax deductible?

The lockdown over Christmas last year due to the Coronavirus pandemic saw hordes of businesses moving the traditional office Christmas party online. So if you’re thinking of organising a company get together this year now restrictions have lifted, what savings are there to be made that will help keep your profits and your festive spirits high?

While there is no specific tax relief for Christmas parties, there is limited tax relief available for an annual event, providing certain conditions are followed.

How does it work?

HMRC states that the rules allow employers to spend up to £150 per head (including VAT) towards the costs of an annual function such as a seasonal party, without creating a tax liability. This includes the costs of booking a venue, catering, entertainment and decorations etc.

To qualify the party must be an annual event which is open to all staff generally (shareholders are excluded from this), or all staff at a specific location, if the employer has more than one location. If the employer has more than one annual event in a tax year, for all the events to be tax-free the combined cost per head must be no more than £150.

An additional £150 may be claimed for a plus one for each employee, providing they are either a partner or family member.

If any of your events cost less than this per head, you may be able to count them as exempt. However, you won’t be able to do this if you’ve already used up the £150 exemption on another event in the same year.

The full costs of any additional events that exceed this limit will need to be reported in full as a taxable benefit, even if they cost less than £150 per head on their own. Staff entertaining above or below the £150 threshold is normally a deductible expense for computing a company’s taxable profits chargeable to corporation tax.

Where benefits may become taxable, employers may wish to put a PAYE Settlement Agreement (“PSA”) in place to settle, on the employees behalf, the income tax and NIC due to HMRC on certain types of benefits and expenses payments.

Virtual Christmas parties

Although restrictions have lifted in the UK, not everyone is comfortable with the thought of social interaction at events yet. For those considering a virtual Christmas event this year, the good news is that the same rules as above apply. It’s best practice to organise your event well with clear detailed expenses matching any expenditure so you can show HMRC that it qualifies for the relief.

Christmas gifts for staff

If parties are off the scene altogether there are certain gifts for staff at Christmas that are also tax free if structured correctly. Employers are allowed to provide their directors and employees with certain “trivial” benefits in kind tax free. Under the trivial benefits rules, employers can provide benefits costing up to £50 (including VAT) to an employee without tax consequences – provided that these benefits are intended as genuine gifts and not intended as a reward for their work. There is also an annual limit of £300 for the total amount of trivial benefits a director can be gifted, this is in addition to the £50 individual limit per gift made.

This exemption applies to small gifts to staff at Christmas, on their birthday, or other occasions and includes gifts of food, wine, or store vouchers.

What are the conditions for the exemption to apply?

There are of course a number of conditions that need to be satisfied to qualify for the exemption:

  • The cost of providing the benefit does not exceed £50
  • The benefit is not cash or a cash voucher (i.e. a pre-loaded bank card).
  • The employee is not entitled to the benefit as part of any contractual obligation such as a salary sacrifice scheme
  • The benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services)

The trivial benefit is not an allowance, therefore as soon as the cost of the gift exceeds £50, the entire amount will become a taxable benefit. In addition, this is not a solution for those employers who usually provide a gift under the trivial benefit rules already in addition to a party. Where two gifts are made for the same purpose, HMRC will combine the costs when applying the £50 trivial benefits limit.

Find out more

If you have any questions, please get in touch with one of our team on 01273 043678.