Are you planning a Christmas party for your office staff and wondering whether the Christmas party tax deductible or not? No worries. Understanding when a Christmas party is tax-deductible can help you enjoy the occasion without worrying about unexpected tax bills.
HMRC provides clear guidance on what counts as a tax-deductible Christmas party, including limits, eligibility rules, and how directors or small teams can benefit.
This blog breaks down the rules so you can stay compliant while claiming the Christmas party tax deductible.
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What Does Christmas Party Tax Deductible Actually Mean?
A Christmas party tax deductible means that the cost can be deducted from your business’s profits before Corporation Tax is calculated. This will reduce your overall taxable profit and the amount of tax paid by your Company.
A limited company can claim the cost of a Christmas party as a business expense in the UK if certain conditions are met. These conditions help to make it a Christmas party tax deductible item and a tax-free benefit for employees.
Are Christmas Parties Tax Deductible?
In general, the cost of a staff Christmas party (or annual staff function) is a tax-deductible expense when calculating profits for Corporation Tax. The key issue is whether it is also a tax-free benefit for the employees attending.
If the conditions below are not met, the event is a taxable benefit in kind (BIK) for your employees. This must be reported on form P11D, and the employer is required to pay Class 1A National Insurance contributions (NICs).
What Are The Conditions Set By HMRC?
For a staff party or annual function, the following conditions should be met:
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- Annual Event: It must be an annual event, such as a Christmas party or a summer barbecue. A one-off event like a company anniversary may not qualify.
- Open to all employees: The event must be open to all employees. If the business has multiple locations or departments, separate parties can be held, provided all staff can attend one of them.
- Cost limit: The total cost must not exceed £150 per head.
The £150 Annual Exemption Explained
Once you understand how a Christmas party can be tax deductible, you will see that the £150 limit is an exemption, rather than an allowance.
- This means that if the cost per head is £150 or less, then the whole price for the employees is tax-exempt. If it happens, no reporting to HMRC is required. Input VAT can also be reclaimed by the employer, provided the event is solely for staff.
- If the cost per head is £150.01 or more, the whole amount is a taxable benefit to the employee, not just the excess.
- The £150 limit is an aggregate annual limit per head. If the combined cost of multiple annual staff events exceeds the £150 per head limit, the employer can still apply the exemption.
Is Staff Party Tax Deductible?
The simple answer is ‘Yes’. The costs of entertaining staff at any annual function, like a Christmas party, are generally an allowable expense for the business. These can be deducted from business profits before tax is applied.
Are Partners Included In The Christmas Party Allowance?
Yes, the costs for an employee’s partner or guest are included when calculating the £150 per head limit. When calculating the cost per head, you must add the total costs of the event and divide them by the total number of people attending.
Example
A company with 10 employees decides to host a Christmas party at a hotel, and all employees bring a partner (total attendees: 20).
Scenario A:
- The total cost, which is inclusive of VAT, is £2,700, and the cost per head is £135 (£2,700/20).
- Now the cost is below the £150 limit. This means the business gets full tax relief, and there is no Benefit in Kind (BIK) for employees. Therefore, in this scenario, the tax is exempt.
Scenario B:
- The total cost, inclusive of VAT, is £3,500, and the cost per head is £175 (£3,500/20).
- This cost exceeds the £150 per person limit. Because of this, the entire amount (£175 per person) becomes a taxable benefit for each employee. It is not just the extra £25 that is taxed.
- The employer has to report the full £175 for each employee to HMRC.
This whole process is possible once you understand the basics and how is Christmas party tax deductible.
Is Staff Entertaining Allowed Under Corporation Tax?
Yes, staff entertaining is generally an allowable expense for corporation tax purposes. This is allowable as long as it is incurred wholly for the trade and is not incidental to entertaining clients or customers. This is possible once you understand whether the Christmas party tax deductible or not in such scenarios.
If You Are Self-employed, Can You Claim a Christmas Party?
No, if you are a self-employed, you cannot claim the cost of your own Christmas party as a business expense. HMRC considers entertaining yourself to be a personal expense (drawings), not a business one. These are necessary in understanding whether your Christmas party is tax deductible.
No Specific Allowance
The £150 annual event exemption is an employment tax exemption and does not apply to sole traders or partners in a partnership.
Employing Staff
If a self-employed person employs other staff, they can claim the cost of a staff Christmas event for those employees on the same £150 per head basis.
Working Meals
The only exception for meals might be if the self-employed individual is travelling for business and the meal is a reasonable subsistence cost, not an entertainment event.
Is a Christmas Party Tax Deductible For a Sole Director With No Staff?
Yes, for a limited company sole director who is also an employee, the cost of an annual event can be claimed as a tax-deductible expense, and it can be a tax-free benefit (not a benefit in kind).
What Counts As a Tax Deductible Christmas Party Expense?
Having a tax deductible Christmas party has some eligible and non-eligible costs. They are explained below:
Eligible And Non-Eligible Costs
- Eligible costs (included in the £150 calculation): Food and drink, venue hire, entertainment, transport, accommodation, and VAT. The costs of guests (e.g., a director’s partner) must also be included in the total headcount for the per-person calculation.
- Non-eligible items for this exemption: Cash or cash vouchers given as gifts are treated as earnings and are fully taxable through payroll. Client entertaining is generally not an allowable expense for tax purposes.
Examples And Exceptions
Multiple events: You can have multiple events in a tax year. Ensure the combined cost per head across all exempted events does not exceed the total £150 limit per person per year. This can help you ensure having a tax deductible Christmas party.
Trivial benefits: Small, non-cash gifts costing £50 or less per person may be exempt under the separate trivial benefits rule. This is exempt up to an annual cap of £300 for directors of close companies. These are separate from the annual event exemption.
How Do You Claim a Tax Deductible Christmas Party Correctly?
Since you have gotten the idea of how is Christmas party tax deductible, understanding how to claim it is also essential.
Bookkeeping Requirements
- The expense should be recorded in the company accounts under a category like “staff welfare” or “staff entertainment”.
- Keep detailed records, including all receipts and invoices, the total cost calculation, the number of attendees (employees and guests), and a note that it was an annual event open to all staff.
Avoiding Disallowable Expenses
- Do not exceed the £150 per head limit if you want the event to be an exempt, tax-free benefit for the employee/director.
- Ensure the expense is a genuine staff function and not primarily for entertaining clients, as client entertainment is disallowed for corporation tax purposes.
- Do not simply claim a flat £150 allowance without actually incurring the expense and retaining proof of the event.
Bottom Line
The key to making your Christmas party tax deductible is understanding HMRC’s conditions, especially the £150 per head allowance and who qualifies as an attendee.
As long as your event meets the rules and is open to all staff, your Christmas party tax deductible claim should be valid. With proper planning and accurate record-keeping, you can enjoy a compliant, cost-efficient celebration each year.
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Disclaimer: All the information provided in this article christmas party tax deductible, including all the texts and graphics, is general. It does not intend to disregard any of the professional advice.