Tax implications for Christmas parties for employees

For any business, throwing the Christmas party is a great morale booster. The year might have been a contentious one, with lots of ups and downs. Like any business, you pulled together when it mattered most. Now, you can enjoy a well-earned period of relaxation. However, you might now wonder if throwing a Christmas party for employees is a good idea?

Should my company throw a Christmas party?

Of course, it’s entirely an in-house decision. You are under no pressure to make a choice, so you shouldn’t feel forced into throwing a party. Instead, take a closer look at how the year has gone. Is a Christmas party for your employees the right thing to do?

Whether or not there has been a deserving year in terms of performance would be the first thing to consider. More importantly, we recommend that you take a look at throwing a Christmas party for the potential benefits. Staff can often come together and bury hatchets, and they might find it easier to work out workplace concerns. Most importantly, it allows staff to find out more about the people they work with. It’s easier to mingle and interact without professional pressures.

There are, though, some considerations. Let’s take a look at some of the tax implications:

Is the Christmas party a viable business expense?

This is indeed an allowable expense for the business, so long as it’s not incidental to entertaining other people. It must purely be in-house entertainment. Inviting customers, sponsors and suppliers will need careful consideration as these costs will not be tax deductible. Therefore, when calculating the cost of the Christmas party business expense, remember to apportion the costs pertaining to staff entertaining and client entertaining accordingly.

The general rule is that the party is not a benefit. HMRC specify as long as it is an annual event open to all staff and the total of all the event in a given tax year does not exceed £150 (inclusive of VAT) per head.

Is there an annual limit on entertainment costs?

The cost of £150 per head is for staff only. Your total head count will be the total number of attendees, including staff and guests. Keep in mind the per head cost covers everything from start to finish of the evening, such as transport and accommodation. If the cost exceeds £150 per head, you will be liable for the entire cost to be seen as a benefit, not only the excess.

Also, £150 per head is for the whole tax year, so if you threw a summer party and then a Christmas party this will need to still fall within the per head price remit. To work out your per head cost, simply take the cost of the party and then the number of people who came along. If your party was attended by 100 people and the cost of the party was £30,000, it would be taxable at £300 per head. This is VAT inclusive, too, so keep that in mind in your budgeting for the Christmas party.

What should we do if we go over the £150 per head threshold?

If you exceed the threshold, you could attribute the cost of the party to each staff member via their P11Ds. However, this will mean each staff member would pay tax on this as they would normal earnings. This might cause problems with your staff, so consider this carefully.

The alternative is that you could look to agree a settlement with HMRC via a PAYE Settlement Agreement. This will mean you pay more in tax and National Insurance, though it may be the only available option to pay the excess.

What are the potential VAT implications of having a Christmas party for employees?

Handling VAT for your Christmas party for employees is often quite confusing. For example, you could look to recover VAT paid on business expenses if you are VAT registered. However, entertainment expenses will not fall under this ratio. Therefore, you should look to avoid trying to claim any of the VAT on these expenses. Many businesses make this mistake, but it can be a costly mistake to make.

Doing so could see you fall under a VAT inspection, which might see you pay a fair amount more than you intended. Therefore, the only way to claim VAT for business entertaining expenses like a Christmas party would be to ensure that the event is genuinely to reward staff. You cannot claim input VAT where the employees are just there to act as hosts for non-employees or if the event was Partner-only or Director-only. Additionally, if family members (or other guests) of employees are invited free of charge, then you will not be able to reclaim all VAT. It should be entirely as an entertainment evening and only VAT relevant to staff can be claimed.

If you are unsure of what to do, then you should seek financial advice. It’s important that you are accurate on VAT claims and taxation, as it can see significant penalties paid. Throwing a Christmas party for your staff is often the right thing to do, but it’s important that you do it right.

Should your company choose to throw a Christmas party for employees, consider getting advice on the spending. At Devonshire Green, we can help you to better understand what issues you might face as a business, and help you to avoid the potential penalties you might incur. It’s better to deal with a Christmas party properly, and avoid turning a celebration into a problem.

Nick Bagga