What are the tax implications of Christmas parties?
March, 5 2024
As a business owner, it becomes only natural for you to look at things from a financial angle. One such example is having the annual Christmas party. There are various factors you need to be aware of from both a tax and VAT point of view when planning your annual Christmas party.
Of course, we understand that for many, such implications often come second to the actual planning and enjoyment of the party itself, but to help you make the most of your budget and enjoy the festive period even more, we have provided answers to some important questions surrounding the tax implications of having a Christmas party.
Are Christmas parties an allowable expense?
If the party is just for your employees, then the answer is yes. In general, all costs associated with staff entertainment, such as Christmas parties, are tax deductible. However, if your customers were also attending the party then the situation becomes less clear. Because supplier/customer entertainment is not tax deductible, you would have to carefully calculate the cost for any customers/suppliers attending the event separately to the cost of the party for your employees.
Are Christmas parties taxable on employees as a benefit?
Strictly speaking, your Christmas party is not considered an employee benefit if it is:
- Only an annual event
- Is open to all employees
- The total for such ‘annual events’ does not exceed more than £150 per employee (not including VAT)
- As you can see, each of these requirements are open to interpretation. We have therefore broken each of them down further to help you better understand what each of the mean to your business.
What is an ‘annual event’?
HMRC uses the ‘annual event’ classification to distinguish such events from more frequent events, such as corporate hospitality which can often occur at multiple times throughout the year. Events such as Christmas parties and summer BBQs are considered ‘annual events’ because they are infrequent and rarely occur more than once a year. Therefore, Christmas parties are in general not considered a benefit; meaning your employees will not be taxed.
A Christmas party for all your employees
This is quite self-explanatory; your Christmas party will not be considered an employee benefit as long as all of your employees are invited to it. This does not mean that all employees need attend the party of course, but that they must receive a genuine invitation. This means that if you have a Christmas party in which only selected members of staff are invited to attend, these individuals will be taxed for the party as it will be considered an employee benefit by HMRC.
Your party costs no more than £150 (inclusive of VAT) per employee
This area is a little more complicated and will, therefore, require some calculation on your part in order to make sure you meet this requirement. This cost is calculated from the point of view of everyone attending the party – not just employees – therefore including employee friends and family members. When calculating the total cost, you need to consider every aspect of the party, from beginning to end. This includes any required transportation to and from the event provided by you the employer, as well as any accommodation that is agreed. If after calculating all such expenses you find that the cost of your Christmas party does not exceed £150 (inclusive of VAT) per head, then your employees will not be taxed as the event will not be classed as an employee benefit.
The £150 threshold is for the entire tax year
It is important to note that this £150 per employee limit is calculated for the entire tax year, not per event. Therefore, if you have an event in the summer and then another one at Christmas, it is the total of these two events that will be calculated regarding the £150 limit. Furthermore, if you do exceed this limit, it is the total cost of the events that becomes an employee benefit, not just the amount you go over the £150 threshold.
What this means is that, if for example, you have one event in the summer that costs £50 per head and then your Christmas party costs £110 per head, you will have crossed over the £150 threshold. As you are allowed to select which event makes best use of the £150 tax emption threshold, you could, therefore, choose the Christmas party to be exempt, with the £50 per head for the first event then being considered a taxable benefit for those employees in attendance.
What if my Christmas party exceeds £150 per head?
If after your calculations you realise your Christmas party is going to exceed £150 per head, you have two options. For example, if the total cost of the event is £170 cost per employee, this must be included on their P11D – this means if they take a guest, their total would be £340. As a result, your employees will pay tax on this amount just the same as if they had earned the money through employment – something that is likely not to go down too well with your employees! Furthermore, your business will also have to pay National Insurance on the total cost at a rate of 13.8%.
Your second option is that you can contact HMRC and agree with them to cover the tax and NI of your Christmas party through a PAYE Settlement Agreement (PSA) – this will remove the burden from your employees but will mean that your business will have to pay slightly more. This is something that you will obviously have to weigh up yourself as a business owner. Whilst having employees pay the taxes themselves may save your business a little money, you should consider what this may do to employee morale and whether this is more important in the long-term than saving a little money.
