Annual Christmas Party Exemption
It’s common practice for employers to host Christmas parties or other annual functions for employees for their hard work throughout the year. HMRC understands this and considers these costs to be legitimate business purposes. With that being said, there are rules that must be adhered to benefit from HMRC’s tax relief.
Eligible events include the following but are not limited to, Summer Barbecue and Christmas Party. These parties must be open to all employees and directors, whether that be across the whole organisation or for multiple locations/departments.
There is an annual exemption for the total cost of the party, this is a ‘cliff-edge’ exemption of £150 per head (including VAT). The total cost of the party includes anything that is expected to be covered for the event such as transport, food, drink, and overnight accommodation. Should the total cost exceed £150 per head, the full cost of the party becomes taxable on the employees as a benefit in kind.
Usually with these events, employers will allow employees to bring guests. The exemption also covers guests and it does not stipulate the number of guests an employee can invite. However, these additional guests are also included when calculating the total cost per head. Therefore, should the cost exceed the exemption the employee will be chargeable on the full cost of themselves and any guests attending.
How to report taxable benefit?
If you find yourself exceeding the annual exemption, then it’s important that you report this to HMRC. This can be done in several ways, via payroll, P11D, or PAYE Settlement Agreement (PSA). Not only is it important to report the benefit correctly, provided you meet the relevant conditions the tax charge can be settled by the employer - allowing your employees to truly benefit from the Christmas party.
Additional implications
The annual exemption can only be used once per year. Therefore, if you host more than one event in the same year, there will only be a charge if the total cost of both parties exceeds the £150 per head exemption. If this is the case then whichever event best utilises the £150 exemption is exempt and the other will be fully taxable on the employees. Should both events exceed the exemption, then both will be chargeable.
During the pandemic, virtual parties became extremely popular for many businesses. These types of events are also covered by the same exemption, however, there may be additional steps to take to provide HMRC with evidence of the event.
VAT
For employers, VAT is usually claimable on these expenses and HMRC recognises that these costs are completely legitimate expenses for business purposes. However, similarly to client entertainment, HMRC does not allow VAT incurred on costs for other non-employees to be recovered. HMRC would expect the business to apportion the VAT incurred on costs based on headcount, with the portion relating to entertaining non-employees being blocked from recovery under business entertainment rules.
Conclusion
Whilst HMRC’s Christmas party exemption allows companies to provide an event for their employees, to boost workplace morale, without them incurring a tax charge. Our advice is that it’s always best to check in with Your Tax adviser to understand the tax implications of hosting parties for staff.