Happy Holidays – Tax Implications for Your Staff Christmas Party: What You Need to Know

As the weather shifts into autumn and the days get shorter, you are probably thinking about planning your team’s Christmas party.

Planning a staff Christmas party can be one of the year’s highlights, and a great opportunity to bring your team together. But did you know that you can spend up to £150 per person (including VAT) a year, as a tax-deductible expense?

This can be split between different staff events throughout the year, and if you don’t go over the £150 annual limit, it’s all tax free in the hands of the employees

Let’s break down the essentials of how to keep your Christmas party tax-deductible and VAT-claimable, ensuring your business makes the most of the festive cheer, without worrying about an unexpected tax bill.

Can You Claim Tax Relief on Your Staff Christmas Party?

Yes! HMRC offers a tax provisions for team events known as the Annual Event Allowance. This allows small businesses and limited companies to claim tax relief on staff parties, including Christmas and other annual events. If done right, you can also claim VAT on your expenses. Here’s what you need to know:

• The event must be available to all employees – This means everyone in your team should be invited, not just management or select groups.
• The total cost per head must not exceed £150 – This £150 per head allowance is VAT inclusive and covers everything from food and drink to transport, accommodation, and entertainment.
• The £150 limit applies per tax year – If you’ve hosted other staff events (like a summer party), you’ll need to factor those into the total. If, for example, you spent £80 per head on a previous event, the Christmas party allowance can only cover up to £70 per head.
• This limit is VAT inclusive – this extends to the cost of the whole event including transport, accommodation, all food and drink, any entertainment and any other related costs.
• It must be an annual event – one off events such as celebrating the 25^th anniversary of a business, do not qualify.

What Happens If You Go Over the £150 Per Head Limit?

Here’s where things get a little tricky. If the cost of your Christmas party exceeds £150 per head, the whole amount becomes taxable, not just the excess. This would need to be reported as a benefit in kind (BiK), meaning both your business and employees may face extra taxes.

For example, if your party costs £160 per person, the entire amount will be treated as a taxable benefit, and your employees will face personal tax charges. You can report this on a P11D form or, alternatively, enter into a PAYE Settlement Agreement (PSA), which allows your company to settle the tax bill on behalf of your employees.

VAT Claims on Staff Entertainment

Good news: you can claim VAT back on costs related to your Christmas party, if the event is for employees only. If customers, suppliers, or partners are invited, then the VAT reclaimable portion will be limited to the expenses for your staff.

Planning Ahead Is Key

HMRC’s £150 per head allowance hasn’t changed in over 20 years, which, given rising costs, means more businesses could find themselves tipping over the limit. By planning ahead and keeping track of costs, you can avoid unexpected tax liabilities and enjoy the festivities stress-free.

In Summary:

• The staff Christmas party allowance is £150 per head, VAT inclusive, and covers all party-related expenses.
• If you exceed the £150 limit, the whole amount becomes taxable.
• You can claim VAT on your party expenses if the event is just for employees.
• If you go over the £150 limit, consider a PAYE Settlement Agreement (PSA) if you want to cover the tax and National Insurance costs on behalf of your team.

Ready to Host a Tax-Deductible Christmas Party?

The last thing you want is for your festive celebrations to leave a sour note due to unforeseen tax implications. Make sure your event stays within the allowance and that you’re making the most of the available tax relief.

Need advice on making your staff Christmas party tax-efficient? Contact our expert tax team today, and we’ll help you navigate the rules so you can focus on what matters most, celebrating the season with your team!