30.11.2021 | Tax

How to ensure your office Christmas party is tax-deductible

Claim the costs of entertaining staff as deductible spending for corporation tax purposes. 

With the festive season fast approaching, businesses up and down the country are in the final stages of planning their annual Christmas celebrations.

From turkey dinners to office drinks, the annual party is a big day in the calendar for most businesses – especially after more than a year of pandemic disruptions.

But while a restaurant meal or a night at the cocktail bar can be an expensive soiree, companies are able to claim back spending for corporation tax purposes.

Here, Andrew Diver, Head of Tax from Beatons Group, explains how businesses can ensure their Christmas party is tax-deductible.

How does it work?
While there is no specific “Christmas party exemption”, limited companies can claim the costs of entertaining staff as deductible spending for corporation tax purposes. This will extend to the Christmas party as long as the event is not also intended to entertain customers.

However, it is also important to ensure that the cost of the event isn’t treated as a taxable benefit for employees attending. For the annual event exemption, the event must meet a set of conditions.

How do you qualify?
Expenditure of up to £150 per head on an annual staff function, such as a Christmas party or a summer gathering, can be exempt from both Income Tax charges and employer’s National Insurance. It doesn’t have to be a single function. The exemption can cover several events, so long as the total cost per head does not exceed £150 per tax year.

The £150 per head figure is calculated by taking the costs of the event, transport and accommodation divided by the number of attendees. If the cost of an event exceeds £150 per head, the total cost becomes taxable, not just the excess over £150.

To benefit from this, the events must also be open to all employees. Don’t worry if you have premises in Felixstowe and Liverpool; you don’t all need to go to a single party for the exemption to apply. Where there are company premises in a number of different regions, it is important that all employees in each region are invited.

Virtual parties in the Covid age are also covered by the exemption, meaning associated costs such as gifts for consumption at the party are also tax-deductible.

What if you exceed the limit?
HMRC is strict in ensuring the protocol is followed, with any costs exceeding the limit needing to be reported. Where an event exceeds the limit, it would need to be reported on employees forms P11D, and the employee would then be liable to tax on their share of the cost of the event.

There is, however, the possibility for the company to reach a PAYE Settlement Agreement with HMRC to pay the tax on behalf of the employees.

Can you claim back VAT?
VAT can be claimed back so long as the event falls under “staff welfare” and is not deemed by HMRC as a means of entertaining clients.

Revenues officials may also apply restrictions to how much you can claim depending on the number of non-employees who attend.

For more information on Beatons Group and how their staff can help you and your business with tax-related enquiries, visit beatonsgroup.co.uk