An employee Christmas party is a great way to reward your workforce for their hard work over the course of the year – and the good news for your company finances is, Christmas parties are generally tax deductible.
However, there are some limits on this, and if you step outside the permitted exemptions, you can find yourself incurring a tax bill for the full amount.
The exemptions outlined below are permitted under Section 264 ITEPA 2003 – and it is important to allow for all of the rules described, as failing to comply with just one area could prove costly in the final count.
First of all, it’s worth noting that the exemptions can be applied to any annual function – it doesn’t have to be a Christmas party, it could equally be a summer barbecue or any other annual gathering.
The main rule is that the event must be open to employees generally either across your whole company, or at each individual location if you have multiple sites.
You can also offer individual parties to separate departments – HMRC’s example for this is individual wards within the same hospital, but the rule can be applied to any workforce which is clearly divided into different sections.
If you hold several events over the course of the year, you can combine them by calculating the cost per head for each event, and adding these averages together.
Your annual exemption can be up to £150 per person – if multiple events together have a combined cost per head of more than this, you must pay the relevant tax on those that take you over the £150 threshold.
Transport and Accommodation
If you offer a single central Christmas party for staff across multiple offices or locations, you might want to pay for their travel costs and overnight accommodation – but this can be a big problem.
Any contributions you make towards either of these costs must be factored into your cost-per-head calculations, which is likely to make a large addition towards taking you past the £150 limit.
For this reason alone, if you have multiple locations, it might be sensible to arrange separate parties for the staff at each – or make sure you schedule your event so that people can easily make their own travel arrangements.
Remember that the £150 limit is not a set amount to be deducted, but if an event takes you past that threshold, tax becomes chargeable on the full amount.
So for example, a single Christmas party with a cost of £160 per person becomes fully chargeable for tax; for two events at £90 per person each, one would be tax deductible, but the second – which takes you past the £150 exemption limit – would be fully chargeable.
The tax must also be paid on non-employee guests, for example friends and family, or any other ‘plus ones’ you may have permitted.
Ultimately, your Christmas party or other event should be:
- Open to all employees in one department, at one location, or across the whole company.
- At an average cost per head of less than £150.
- Calculated including the cost of provided transport and accommodation, and VAT.
Step outside these limits, and the cost of your Christmas party could quickly spiral once you factor in the tax payable on the event.