We often get asked the question “is a staff Christmas party a tax allowable expense?” The rules around social functions are followed, staff events like your end-of-year party, or your summer barbecue are tax-deductible for you, as the employer, and tax-free for your staff.
This means you can claim back some of the expenses you incur when putting on a social event for your team, while also helping to build better team bonds.
Whether your party is taking place in the office, at a local restaurant or via Zoom for your remote-working teams, you can be confident that you can recoup some of these expenses by making the relevant claim – The HM Revenue & Customs (HMRC) rules apply equally to any online staff events and remote parties.
Meeting the rules for tax-exempt staff functions
The annual function exemption means that your company can deduct costs for tax when holding an eligible annual staff social event. It also means that your employees don’t pay tax or national insurance contributions (NIC) on costs relating to these social events.
This all sounds like good news for the company bank balance, but how does the exemption actually work? And what are the specific rules that you need to know about?
- How do I know if my event is eligible? – for your event to be eligible, it must be company-wide and meet the requirements of a structured social event; i.e. where food, drink and possibly entertainment are provided. As long as all staff are covered somewhere, there can be separate functions for branches, departments, or other office locations etc.
- What records do I need to keep? – as a company, you’ll need to keep records of who was invited to the social event, and who actually attended. You’ll also need to record the costs of putting on the event, including all associated travel and accommodation.
- What’s the expenses limit per person? – there’s a limit per attendee (including partners invited as guests) of £150 including VAT. This total can be split over multiple functions – e.g. over your Christmas party, plus an Easter party and a summer event. NOTE: this can’t be disguised client entertaining. Guests must be employees or their partners and not clients or suppliers etc. Although the £150 includes VAT, the VAT in respect of employees (but not invited partners) is deductible in the same way as any other input tax on business expenses.
- What happens if this limit is exceeded? – If the total cost per person is exceeded, the costs are still deductible for the company. However, if the cost of one or more individuals exceeds the £150 p/person limit, this would be seen as a taxable benefit for the employee (including the amount for their guests.)
- How does this work in practice? – if you hold three annual functions costing £70/£60/£40 per head, your choice may be to apply the exemption to the £70 and £60 functions (Total cost of £130 per head). The balance of £20 (from the £150 limit) is lost and the £40 is taxable and NI’able. Functions covered by the £150 exemption do not have to be reported on form P11Ds.
The annual exemption is a great benefit for your company and staff. And it’s worth noting that if you’re a one-person company, that you could equally apply the benefit to taking your spouse out for a social event.
Talk to us about claiming expenses for your staff events
If you’re looking to run a staff function in the near future, talk to us. We can help you ascertain if your planned function meets the annual exemption requirements, and how you can claim back your party costs as a tax-exempt expense. As your adviser, we’ll help you draw up clear, well-explained internal guidance to make sure any staff parties don’t unintentionally fall outside of the rules and we will make sure that you are maximising your tax deductible expenses.
Get in touch, if you want to discuss this further, or if you want to arrange to cover any tax and NI for your employees through a PAYE settlement agreement or read our latest blog post Can directors and employees receive gifts from the company tax free?
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