With the office Christmas party season upon us, we are often asked by clients if the costs of a festive season staff outing can be provided tax-free. The short answer is: ‘yes’, HMRC does allow an exemption from tax, but there are specific terms and conditions that need to be adhered to.
HMRC does allow an exemption from tax, National Insurance Contributions and P11D reporting if your Christmas party is an annual event, open to all employees and costs no more than £150 per head (inclusive of VAT). If you have more than one business location and want to ensure you will qualify for the ‘open to all employees’ criteria you can either hold one event to which all staff are invited or hold separate parties in different locations, as long as you ensure that each of your employees is entitled to attend one party.
It’s important to note that the £150 per head is not an allowance, but a threshold for exemption. Therefore if your Christmas party costs £200 per head, you cannot offset the first £150 of this. This exemption does not cover you per event but per tax year, so you also need to consider that if you put on more than one annual event for your staff - for example a summer barbeque as well as the Christmas party - the joint cost for both events must not exceed £150 per head.
However if your annual costs for all staff events fall below the exemption level you would find yourself in a tax free situation. If, for example, your annual barbeque cost £40 per head and your annual Christmas Party costs £100 per head, then the full amount falls would fall within the £150 exemption.
It’s also important when apportioning the total cost of the event between the total number of employees in attendance, that you are also able to include any family and household members who attend as guests. Imagine you have 100 employees attending your Christmas function, all of whom are accompanied by their partners making it a total of 200 guests. Providing that the cost of the meal, entertainment, transport, accommodation and VAT does not exceed £30,000 then there is no tax liability. If, however, the total came to £35,000 (£175 spend on each guest), the full amount becomes chargeable. The company would also be liable to Class 1A National Insurance Contributions on the full amount at 13.8per cent and would have to report the £175 on forms P11D. Alternatively, the company could enter into a PAYE Settlement Agreement in order to pay the tax on the employees’ behalf, but this can be an expensive option as costs are grossed up for tax and NIC purposes.
Turning now to the question of VAT, the rules are slightly different as this is only recoverable on the cost of employees attending the party and not in relation to any family members or other non-employees who attend the party. Therefore, as with the example above, if a Christmas party was attended by 100 employees each of whom were accompanied by a partner, only 50% of the VAT incurred could be reclaimed.
While I wouldn’t want to dampen the spirit of the annual Christmas party with too much focus on tax, it is certainly an issue to consider in this current climate of financial austerity. Besides, knowing that you may be in line for a little break from the tax man can help you enjoy yourself that little bit extra as you tuck into your glass of mulled wine at the company’s annual festive get- together.
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