With Christmas party season in full swing and the holidays right around the corner, it is always worthwhile remembering that HMRC offer the directors of limited companies tax incentives on the annual office Christmas party.
The tax laws do not specifically describe the relief as being for the purposes of an office Christmas party for employees.
However, HMRC allows limited tax relief against the cost of holding a function for your staff, on the proviso that certain conditions are met.
Annual Christmas party allowance rules
Like all expenses, the office Christmas party must be wholly and exclusively for business purposes.
Christmas work parties must obey the following rules in order to satisfy the criteria for an exemption from tax and National Insurance.
- The party must be an annual function – like a yearly summer celebration or a Christmas party. It cannot be a one-off event.
- You must hold an event to reclaim the costs.
- The event must be open to all company staff and have the majority of attendants be employees.
- Shareholders are not included in the exemption if they are not employees nor directors.
Furthermore, the Christmas party must not cost more than £150 per person; this figure is inclusive of VAT.
This cost per head can include food, drink, transport, overnight accommodation, and the overall cost of the party. To calculate the cost per head, you should divide the total cost of the function by the total number of people (including non-employees) who attended.
You are able to claim an additional £150 per head for a plus one for each employee. However, the plus one must either be a spouse or family member.
Exemption or allowance?
You should be mindful that Christmas party costs are considered an exemption and not an allowance.
Therefore, party costs should not exceed the £150 per person threshold provided by HMRC.
If your party exceeds this amount per person, then the entire amount (including the initial £150) becomes liable for tax and National Insurance and must be recorded on your PAYE Settlement Agreement (PSA).
Moreover, the £150 cost per person exemption spans the whole year.
If you hold other staff annual events, for example, a yearly summer party, the combined cost per person attending all parties held that year cannot exceed £150.
What about virtual Christmas parties?
In this new era of remote working ushered in by the pandemic, it is not uncommon for businesses to have turned fully remote and no longer maintain a physical office.
This allows them to hire staff from virtually anywhere in the country, and indeed, the world. This can make gathering their workforce together for an office Christmas party logistically difficult.
It stands to reason that a virtual Christmas party might make sense in this instance.
The question is, are virtual Christmas parties an allowable expense? The short answer is yes!
However, aside from the previously mentioned rules, you must prove to HMRC who attended the virtual party for it to qualify under the annual function exemption.
Being a virtual party, it can become hard to provide meals and drinks for your employees with the allocated £150 per person cost.
We would suggest that you do not provide your employees with the £150 and ask them to reclaim their purchases as an expense. This is because it might be difficult to prove that the individual Christmas expenses were for one organised party, in the event you are investigated by HMRC.
A sensible idea would be to purchase and send Christmas party hampers of some description to your employees to enjoy during the party instead.
However, if you decide to opt for this, make sure you don’t forget to hold the event entirely and just send the hampers alone!
This is because a hamper without a party does not qualify for the exemption. Gifts sent on their own without the accompanied organised event would be allowable under different conditions – possibly trivial benefit rules.
Does the relief apply for sole directors?
A sole director can claim a Christmas party of one or two if joined by a spouse or family member as a plus one.
This is once again assuming that the party meets the previously outlined HMRC rules.
We would suggest speaking to an expert for guidance on this beforehand to avoid falling into any potential tax and National Insurance pitfalls.
Recovering Christmas party expenses
In order to recover your Christmas party expenses, you simply need to record your party costs as a tax-deductible expense when computing your taxable profits.
Assuming you have met all the necessary conditions, it will reduce the corporation tax you will pay at the end of the tax year. Furthermore, the party will also be exempt from tax and National Insurance.
Claiming VAT expenses
If you wish to reclaim VAT on your office Christmas party costs, you are able to do this if directors attended the Christmas party alongside their employees.
However, the VAT is not reclaimable if only a director and their partners attend the event. This is because the goods or services have not been used solely for a business purpose.
When planning to claim tax relief for your office Christmas party, it is important to remember that the allowance is available to limited companies only and not sole traders.
It is also worth knowing that if you hold more than one annual party in a year, you can split your £150 exemption over several different events.
For example, if you had three allowable events: £50 for the first event, £50 for the second event, and the final £50 could be allocated for the Christmas party.
Contact us if you have any queries regarding claiming tax expense relief on your annual office Christmas party.