Planning a staff party is a great way to reward employees, boost morale, and encourage team bonding. But did you know that certain staff events, including Christmas parties and summer gatherings, can qualify for tax relief?
In this guide, we’ll break down the rules for tax-free staff events, so your business can make the most of these exemptions while staying compliant with HMRC.
Tax relief for staff parties – the rules
HMRC provides an exemption for annual staff functions, allowing businesses to claim tax relief and avoid benefit-in-kind charges, provided specific conditions are met:
- The event must be annual (such as a Christmas party or a summer barbecue)
- It must be open to all employees (or all employees at a particular location)
- The event is not just to be for directors unless all your staff are directors
- The cost must not exceed £150 per head, including VAT, for the tax year
- The £150 allowance covers all associated costs, including food, drinks, venue hire, transport, and accommodation
- If multiple events are held, the exemption applies only if the combined cost remains within the £150 limit
If these conditions are not met, the full cost of the event may be considered a taxable benefit for employees, which means additional tax liabilities.
Christmas parties and other year-round events
Christmas parties are a popular way for businesses to celebrate the end of the year, and they typically qualify for tax relief under the above rules. However, businesses can also take advantage of the exemption for other events, such as:
- Summer barbecues
- Team-building retreats
- Annual award ceremonies
The key is that the total cost must not exceed the annual event allowance of £150 per head. Provided the threshold 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.
That means, if you’ve already held a Christmas party then you can still host another event and both can be exempt from tax, provided the combined cost per head for the year does not exceed £150. If the combined cost exceeds this limit, the employer can choose which event to apply the exemption to for optimal tax benefits.
Example Scenario
- Your business hosts a Christmas Party. The cost per head is £100.
- Your business then hosts a summer barbecue. The cost per head is £70.
In this case, you can nominate the Christmas party for the exemption, making the £70 Summer Barbecue taxable. However, as the employer, you can manage the tax and National Insurance on behalf of the employees through a PAYE settlement agreement, avoiding direct tax implications for the employees.
How to calculate the cost per head
To calculate the cost of the benefit:
- Add together the cost of the party or function (room hire, food, entertainment, prizes, etc), the costs of transporting staff and their guests, and the cost of any accommodation provided.
- Divide the total by the number of persons (staff and any other guests) attending the function.
- The final sum is your cost per head. To qualify, the cost must come to less than or equal to £150 per head.
If you have a large function it may be impossible to count up exact numbers of those who physically attend (particularly if people come and go at different times). If it is impossible to work out actual attendees then you will have to estimate numbers according to what was budgeted or booked. Bookings are normally made on a ‘per head basis’.
What if the allowance is exceeded?
If the cost of an event exceeds £150 per head, the entire amount becomes a taxable benefit and must be reported on a P11D form. So, for example, if the cost per head works out at £152, then £152 is taxable as a Benefit In Kind and goes on your employees’ P11d, not £2.
Tax treatment for employer
The cost of the staff Christmas party (or any staff annual function) is tax-deductible in the employer’s accounts. Show this expense separately in the accounts as it is a staff benefit and therefore a cost of ‘staff welfare’ (or similar).
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)
Can you reclaim VAT costs from staff parties?
If you’re wondering whether you can claim back the cost of input VAT from your staff parties, then you’ll be pleased to hear that you can. However, there are conditions to be aware of:
- 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.
- If you are also entertaining UK clients and staff, you have to disallow a proportion of input VAT (based on the number of clients vs staff).
- 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”. As such, you are blocked from any reclaim of input tax.
- If the event also serves to entertain overseas customers then it may be possible to reclaim input VAT.
If you need advice, speak to one of our VAT specialists.
What about virtual parties?
HMRC has updated their guidance to include virtual annual functions within this exemption, which includes a virtual Christmas party. Virtual parties cannot have all employees in a single location so would ordinarily fail to qualify. HMRC’s revised guidance allows these events to qualify, provided that all of the other criteria are met.
A virtual party is defined as:
- An annual function provided virtually using IT.
An example of this:
- A company holds its annual function virtually using IT.
- All employees are invited.
- A hamper of food and drink is provided for each employee to enjoy during the party.
- The total cost is £100 per head.
The cost is less than the £150 per head maximum and so the function is tax-exempt.
Need more information?
If you need any more support on how to record your staff parties and annual functions properly, please do not hesitate to contact our dedicated team of chartered accountants.
We have a wealth of experience in a broad range of sectors, from construction to the charity sector. Our team work hard to ensure they deliver smart and effective tax advice, helping businesses to grow and succeed. Please do not hesitate to contact us today for a free consultation or call 0161 962 1855.
