Christmas Party Tax Exemptions

HMRC offers tax incentives on the annual Christmas party for directors of limited companies, helping you spread holiday cheer to your staff. Despite the fact that tax regulations do not directly address an allowance for a business to give a Christmas party for employees, HMRC does allow for limited tax relief against the expense of hosting a function for your staff - provided that certain requirements are met.

Christmas party expenses must adhere to the following criteria in order to be excluded from tax and national insurance, just like all other expenses (they must be used entirely and exclusively for business purposes):

-          The event must take place annually, such as a summer or Christmas celebration. It shouldn't be a one-time thing.

-          For the costs to be reimbursed, an event must be held.

-          The event must be free and open to all employees, with a focus on employee attendance.

-          If a shareholder is neither an employee nor a director, they are not covered by the exemption.

-          The price per attendee for the event cannot exceed £150. (including VAT). The cost of the party is entirely inclusive of everything from beginning to end, and the cost per head might cover food and drink, transportation, and overnight lodging. Divide the entire cost of the event by the total number of attendees (including non-employees) to determine the cost per head.

-          Each employee may claim an additional £150 per head for a plus one, but the plus one must be a partner or family member.

Remember that Christmas party expenses are regarded as an exemption rather than an allowance. As a result, party expenses shouldn't go over the HMRC-provided £150 per person cap. In the event that your party pays more than this per person, the full sum (including the first £150) becomes subject to tax and national insurance, and it must be noted on your PAYE Settlement Agreement (PSA).

The entire year is covered by the £150 cost per person exemption. The total cost (per person) of all parties in a single year cannot exceed £150 if you arrange other staff yearly events (like a summer party).

Virtual Christmas party?

A virtual Christmas celebration is, in theory, a valid exception. For the virtual party to be eligible for the annual function exemption, you must nevertheless show HMRC who attended, in addition to the predetermined guidelines.

With your £150 per person quota, it can be challenging to provide food and drink for your staff as it is a virtual party. Because it might be difficult to demonstrate that each employee's Christmas spending were for a single organised event in the event of an HMRC investigation or audit, it is advised that you refrain from giving your employees the £150 and instead ask them to claim their purchases as an expense.

 How to recover Christmas party expenses

When calculating your taxable profits, include the cost of your party as a tax-deductible item in order to recoup your Christmas party expenses. It will lower the corporate tax you will have to pay at the end of the tax year, provided you satisfy the requirements. Additionally, the party will not be subject to tax or national insurance.

 Claimable expenses or not?

If directors attend the Christmas party with their staff, you can claim the input VAT on party expenses. If only a director and their partners attend the Christmas party, you cannot claim the VAT on those costs.