Staff Christmas parties: can you obtain tax relief on your Office Christmas Party? Must all staff attend? Is there tax relief for an owner manager or personal service company owner? Are there any reliefs? How do you avoid a hangover?

This is part of our Tax & Accounting at Christmas Special, as we analyse the tax and accounting treatments of Christmas and open a door in our Christmas Advent calendar to count down each working day until the Christmas holidays in the UK.

In order to achieve special tax status, charitable gifts must be made to a registered charity or community amateur sports club (CASC).

If a body is not a registered charity etc. your gift will be treated as if it is a different kind of gift, this could be one which is allowed or not allowed for tax, depending on the nature of the gift and the recipient.

Accounting by businesses

  • Money expended on the cost of the staff party can be posted to 'Staff Welfare', as if forms part of staff costs.
  • If you are combining your party with customer entertainment, you will need to split the cost between Entertaining and Staff Welfare.
  • The cost of the party will include transport costs to and from the party, room hire, food, decorations etc.

Record keeping for tax
An employer must take reasonable care to ensure that it is able to calculate the annual cost per head of events. When a failure to take reasonable care leads to a loss of tax, Tax Penalties under sch 24 FA 2007 (error or mistake) may well be appled.

You also need to to be able to record the numbers attending any event so that the cost per head can be calculated.

Tax and staff parties

A staff party or an annual function qualfies as a tax-free benefit for your employees providing that you meet the following conditions:

  • The total cost must not exceed £150 per head, per year.
  • £150 includes VAT together with any extra costs such as transport and accommodation.
  • The £150 is a limit and not an allowance: if the cost is £151, the whole benefit is taxable.
  • The event must be primarily for entertaining staff.
  • The event must be open to all staff (in that location, if you have several branches or departments).
  • The event is not just to be for directors, unless all your staff are directors.
  • The cost of the whole event is an allowable expense for your business.
  • You can claim back input VAT but this may be restricted where you are also entertaining customers.

An employer may spend up to £150 per head (inclusive of VAT) per year, in providing annual functions and events to entertain its staff.

Provided the £150 limit is not exceeded, there can be any number of parties, for instance 3 parties at a cost of £50 each – at various times of the year.

Qualifying conditions

  1. The party has to be for all the staff, or if you have divisions or sections you may hold a party for that division or section, separate from the other ones.
  2. There is no tax relief if an event is solely for directors and their families (unless you are the owner-manager, or a family company and you happen to be the only employee(s)).
  3. Other guests may be invited too, but the primary purpose of the event must be that of entertainment for all the staff.

Tax treatment for employer

There is no monetary limit on the amount that an employer can spend on an annual function. 

A party costing more than £150 per head will be an allowable deduction in the employer’s accounts, as the employees would pay tax on a benefit at this level so it is just another form of earnings. The full cost will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.

Parties covered by the £150 exemption do not have to be reported on form P11Ds. If you do exceed the limit, and have created a taxable benefit in kind, you might consider settling it using a PAYE settlement agreement (you then pay your employees’ tax and NICs) (see PAYE & Settlement Agreements).

VAT and annual functions

  1. Input VAT is fully reclaimable on the cost of the function (as it is "staff welfare" and not regarded by HMRC as entertaining), unless you are an owner-manager and having a one-man party, or if the function is mainly for directors (and so excluding other staff). In these circumstances HMRC will block claims for input tax.
  2. If you are also entertaining UK clients as well as staff, you have to disallow a proportion of input VAT (based on the numbers of clients v staff).
  3. If the event is to entertain UK customers and your staff are there to look after the customers, the whole event is regarded as "entertaining"; you are blocked from any reclaim of input tax.
  4. If the event also serves to entertain overseas customers then is may be possible to reclaim input VAT, however you should read HMRC Business Brief 44/10 first.

Links

For more details on Tax and Parties, see Staff Parties and annual functions (freeview guide)

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