As Christmas approaches, many businesses are gearing up for their annual staff Christmas party.

While it’s a great way to reward your team and celebrate the year, there are a few tax implications to keep in mind to ensure your party doesn’t come with an unexpected bill.

Here’s a straightforward guide to help you understand the rules, make the most of tax-free allowances, and avoid any costly surprises.

What Can Be Spent Tax-Free?

HMRC offers a tax exemption for annual events like the Christmas party, meaning it won’t be taxed as a benefit if certain conditions are met. Here’s what you need to know:

1. Annual Event Exemption: To qualify, the event must be an annual one (like a Christmas party, summer barbecue, etc.), open to all employees, and cost no more than £150 per person (including VAT). This per-person cost covers everything – food, drinks, entertainment, venue hire, and even transportation to and from the event.
2. Who’s Included? The £150 allowance is per head, and it applies to each attendee – so if employees are allowed to bring a partner, both the employee and their partner get a £150 allowance each.
3. Whole Year Spending: This £150 limit isn’t per event, but per year. So, if you have other annual parties or gatherings, the total for all events needs to stay within that limit to qualify for tax-free status.

What Happens if You Exceed the £150 Limit?

If the cost per head goes above £150, the whole amount becomes taxable, not just the excess. This means that even if you only overspend by a small amount, the entire cost becomes a taxable benefit. The tax liability falls on the employee, and you, as the employer, would need to report it on a P11D form.

You could choose to cover this tax for your employees by paying a PAYE settlement agreement (PSA). However, this means you’d be covering the cost of the tax on behalf of your staff, which adds to your company’s tax burden.

Practical Tips for Staying Within the Tax-Free Limit

With costs for events and catering rising, here are a few ways to stay under the £150 per head limit:

1. Plan Early and Shop Around: Early booking usually means better rates for venues, food, and entertainment.
2. Host the Event In-House: If you have the space, hosting the event on your premises can save on venue costs.
3. Consider a Virtual or Hybrid Event: If your team is partially remote, a hybrid or virtual component can reduce venue and travel expenses.
4. Opt for Simple Yet Fun Activities: Not every party needs a five-course meal or live band. Sometimes, a relaxed meal, a fun quiz, or a few team games can be just as enjoyable without inflating the cost.
5. BYOB: If appropriate for your company culture, you could consider a “bring your own bottle” or “bring some food” to cut down on the catering costs.

What About VAT?

If your business is VAT-registered, you can reclaim VAT on costs related to the Christmas party if all attendees are employees. However, if guests or partners are included, only the VAT on the employees’ portion can be reclaimed. It’s important to keep detailed records and receipts so that you can accurately split the costs if needed.

Extra Considerations for a Tax-Smart Christmas

If your Christmas party goes over the £150 limit, there are still ways to manage the potential tax impact:

1. Personal Gift Allowance: Instead of spending a bit extra on the party, consider offering each employee a separate small gift or voucher. HMRC’s trivial benefits rule allows you to give small gifts (up to £50 per gift) to employees, tax-free, as long as they’re not cash or performance-related.
2. Flexible Working Party Fund: Some businesses set up a capped “Christmas party fund” and let employees vote on how they’d like it to be spent. This gives employees a say in the celebration while keeping spending within the tax-free limit.
3. Consider a Non-Christmas Event: If you’ve already maxed out your £150 allowance on another party, think about hosting a New Year’s event instead. As long as it’s part of a separate annual celebration and all employees are invited, it can be covered under the same tax rules.

Wrapping It Up

The Christmas party is a fantastic way to celebrate and show appreciation to your team.

With a bit of forward planning and by keeping an eye on the £150 per head limit, you can make sure the event is enjoyable without any unwelcome tax implications.

By exploring creative ways to save and spread the cost, you can keep the festivities tax-friendly for both your staff and your business.

If you think you are bound to exceed the £150 per head limit and don’t want your staff to foot the tax bill then get in touch and we can look at the PAYE Settlement Agreement (PSA) as an alternative.

Have a great celebration! 🎄