Christmas party expenses through a limited company

The festive season is almost here and this year Christmas party planning is normally in full flow.

Having an annual event at Christmas is a great way to reward your employees for a year of hard work. It’s a great way for people to meet and greet their colleagues, let their hair down and celebrate the past year. This type of annual event has taken on even more meaning as more people are now working at home or hybrid working so they see less of their colleagues than before the Covid pandemic hit.

If you run a limited company, it’s important to know the HMRC rules around your annual Christmas party including what costs are allowable expenses for tax purposes is important.

This guide is here to help UK limited company owners who are looking to hold a staff Christmas party. We will cover all you need to know around how to claim Christmas party expenses under allowable business expenses and the conditions you need to meet to qualify for tax relief for your annual party.

HMRC treatment of the annual Christmas party

One question limited company business owners always ask is if their Christmas party costs are tax deductible or if tax relief is available for their Christmas party.

HMRC does provide exemptions for Christmas party expenses to limited companies (but not sole traders) who hold a Christmas party for employees.

HMRC rules for your company Christmas party

HMRC uses the term’ annual event’ for the Christmas party at the end of the year but it also covers other company events during your company’s financial year such as a summer party.

For this annual function exemption to apply and to be exempt from tax and National Insurance, you must follow the strict rules below:

• The party must not cost more than £150 per head (including VAT).
• The party must be an annual event, such as a Christmas party or summer party.
• The party must be open to all your employees.
• Shareholders are not included in the exemption if they aren’t employees or directors.

You can also claim an additional annual Christmas party allowance (or annual event allowance) of £150 (including VAT) per person for a plus one for each employee, providing they are a family member or partner.

This exemption was extended to cover online and virtual Christmas parties as a result of the pandemic.

Other staff entertainment

Apart from this annual event exception, other staff entertainment will be classed as a Benefit in Kind and employees will be taxed on the value of benefits they receive each year.

If any of the events you provide aren’t exempt, you’ll have to report the costs to HMRC and pay National Insurance for them.

You must then:

• report these events or benefits on each employee’s form P11D
• pay Class 1A National Insurance on the full cost of the event

Virtual Christmas parties

In 2020, due to the COVID pandemic, HMRC confirmed that virtual parties/events would also qualify for the exemption as long as the normal conditions apply. Despite the pandemic now being over, virtual event expensing is still allowed in 2024.

However, you should consider how you prove the event took place and how many people attended, in case HMRC asks for evidence. For example, your virtual Christmas party may include entertainment such as a Christmas quiz, magicians, organised online payable events that you can produce invoices for.

To help prove the event took place and how many attended, you could send out a virtual Christmas party hamper to each employee for them to enjoy and consume during the virtual event.

How does the £150 per person exemption work?

The event must also be open to all company staff to attend. You cannot claim for shareholders

If any event cost less than £150 per person, you may be able to count these event expenses as exempt. But you cannot do this if you’ve already used up the £150 exemption on another event.

However, you’ll have to report and pay the full costs of any additional events that take the combined cost over this limit, even if they cost less than £150 per head on their own.

The cost per head can include room hire, overnight accommodation, transport, food and drink, but it must not exceed the £150 threshold.

As with all business expense claims, you must actually hold an event and have invoices or receipts as proof. You cannot simply make a cash claim for £150 per person in your accounts.

To understand if the party qualifies and calculate the cost per head, HMRC guidance says that you should divide the total cost of each function by the total number of people (including non-employees) who attend.

Trivial benefits

If you want to give a gift to your employees instead of organising an event, then you can do this using the trivial benefits rules.

Trivial benefits allow employers to provide a gift up to the value of £50 (inc. VAT) without being charged as a taxable benefit and paying tax on the item. To qualify, the gift should not be cash or a voucher that can be exchanged for cash and it cannot be in exchange for work or recognition of performance.

Employees can receive trivial benefits of £50 or less once a month provided the conditions are met. For directors of limited companies the limit is six monthly benefits in a tax year with an annual cap of £300 for trivial benefits for directors in one tax year.

Can I reclaim VAT on the party expenses?

You cannot reclaim the VAT element on your party expenses if only directors and/or their partners attend the event. However, you can reclaim the VAT if company directors and partners attend a party alongside other employees. This is because HMRC accepts that the tax is input tax and is not blocked from recovery.

Summary

As a limited company owner, looking after your employees and staff’s welfare is crucial. Holding a staff party can be a great way to thank staff and allow them to let their hair down at the end of the year. The Christmas party can be claimed alongside other business expenses as tax deductible if they meet the criteria above.

For advice on Christmas parties or other allowable business expenses, contact our tax team on 03330 886 686 or e-mail us enquiry@dnsaccountants.co.uk.

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