Christmas Party Tax: How the £150 Rule Works for Small Businesses

A staff Christmas party is a great way to thank your team for their hard work. With a little planning it can also be tax efficient, for your employees and for your business. Get the details wrong, though, and a well-meant celebration can leave everyone with an unexpected tax bill.

Here is how the rules work, and what to check before you book.

The £150 per head exemption

HMRC lets employers provide an annual party or similar event for staff without it counting as a taxable benefit, as long as the cost is no more than £150 per head. If the event qualifies, there is nothing to report on a P11D and no tax or National Insurance for your employees to pay.

To qualify, the event must be:

• Annual. It needs to be something you hold every year, such as a Christmas party or a summer barbecue. A one-off event, such as a 25th anniversary celebration, does not count.
• Open to your employees generally. If you have more than one site, it can be open to all staff at one location. Separate parties for different departments can also work, as long as everyone is invited to one.
• £150 per head or less, worked out as explained below.

The exemption covers virtual events too, including food and drink sent to staff working from home.

How to work out the cost per head

This is where most mistakes happen. Take the total cost of the event and divide it by everyone who attends, including partners and other guests, not just your employees.

The total cost includes:

• VAT, even if your business can reclaim it
• Food, drink, venue hire and entertainment
• Transport home and overnight accommodation, if you provide them so staff can attend

For example, a party costing £3,600 including VAT for 20 staff and 10 partners works out at £120 per head, comfortably within the limit.

It is an exemption, not an allowance

The £150 is a cliff edge, not a free allowance. If the cost per head comes to £151, the whole amount becomes a taxable benefit for every employee who attended, not just the extra £1. They would also be taxed on the cost of any family or household guests they brought.

If you hold more than one annual event, such as a summer barbecue and a Christmas party, the costs per head are added together. If the total goes over £150, the events that make best use of the £150 stay exempt and the others become taxable.

So if you are close to the limit, it is worth checking the numbers before you sign off the final bill.

What if you go over the limit?

If the event does not qualify, you have two options. Each employee can be taxed on the benefit through a P11D, or you can choose to pay the tax on their behalf through a PAYE Settlement Agreement so your team is not out of pocket. A settlement agreement keeps staff happy but adds to the real cost of the party, so it is better to plan the budget around the £150 from the start.

Can the business claim the cost?

Yes. The cost of entertaining your own staff is normally an allowable business expense, so a limited company can deduct it when working out its corporation tax. This applies whether or not the £150 exemption is met.

The position changes if the event is really for customers or suppliers. Entertaining clients is not allowable, and if staff are only there to host guests, the cost is treated as business entertainment.

What about VAT?

If your business is VAT registered, you can usually reclaim the VAT on a staff party. Two exceptions catch people out:

• Guests. If partners or other non-employees attend, you can only reclaim the VAT on the share of the cost that relates to your employees.
• Directors only. HMRC does not normally allow VAT to be reclaimed on entertainment provided only for directors or partners. If directors attend a party alongside the rest of the team, that is fine.

If the only people in your company are its directors, the party can still meet the £150 exemption, because it is open to all employees, but the VAT is generally not recoverable.

A quick checklist before you book

1. Is it an annual event, open to all your staff (or all staff at one site)?
2. Have you included VAT, transport and any accommodation in the total cost?
3. Have you divided by everyone attending, including guests?
4. Is the total for all your annual events this tax year £150 per head or less?
5. Have you kept the invoices and a note of who attended?

If the answer to all five is yes, you can enjoy the party knowing it is tax efficient.

How we can help

Whether you run a busy team in Oxford or a small company with a handful of staff, we are happy to check the numbers before you book. We can make sure your payroll and P11Ds reflect any benefits correctly, include the cost properly in your year-end accounts, and keep your VAT returns right. If you are a business owner looking for accountants in Bicester or elsewhere in Oxfordshire, you can see everything we do on our services page.