Christmas is just around the corner, and if you’re a business owner, by now you should be busy planning your business’s festivities. What a lot of business owners miss is that the annual Christmas do can be a taxable benefit for your business, and if you follow the rules, you might miss out on being able to write off the event.
At Tax Driven Accountants, we manage the finances of a number of businesses, and we know how easy it is for businesses to miss out on party allowances.
In this guide, we will explain how to ensure your staff Christmas party is tax-deductible and provide more information about the annual event exemption.
What is the Annual Events Exemption?
Also known as the Annual Function Exemption, the Annual Events Exemption is a UK allowance that allows employers to host social events for staff without them counting as a taxable Benefit in Kind.
Under this rule, a business can spend up to £150 per head per tax year for staff functions completely free of Income Tax and National Insurance.
The Rules Your Party Needs to Meet
Want to ensure that your annual party is covered? Make sure that it follows the guidelines outlined for the Annual Events Exemption; these include:
Must Be Annual
The function must be a regular or recurring event, such as an annual Christmas party or summer fun day. The event must be an annual event, as a one-off event does not qualify.
Open to All Employees
The event must be open to all staff members; if it is exclusively for senior management, it does not qualify.
Cost Limit of £150 Per Head
The total cost of the event, including VAT, food, drink and transport, must not exceed £150 per person to qualify.
How to Work Out the Cost Per Head
Worried that the event you have planned exceeds the £150 limit? You can calculate the cost per head for the Annual Events Exemption by dividing the total cost of the event, VAT included, by the number of attendees.
Many people miss that this includes employees, plus any guests/partners invited to the event.
What Happens if You Go Over £150?
The threshold is strict: if the cost per head exceeds £150, the entire event cost becomes taxable, so you need to be careful with your budget.
Does it Cover More Than One Event a Year?
A common mistake is assuming this budget applies per event, but it’s an annual budget. This means that if you host two annual events, the total per-attendee cost must not exceed £150 to be completely tax-free.
If you have two events and the total exceeds the £150 limit, you can choose which event uses the exemption to save the most tax.
Is the Christmas Party Tax Deductible for Corporation Tax?
You might be wondering if the Christmas party qualifies as a deductible expense for Corporation Tax purposes, and it does. However, exceeding the £150 per head limit does not eliminate the possibility of claiming a tax deduction. The £150 rule pertains specifically to how employees might be taxed personally on the event as a Benefit in Kind, not on the deduction.
If the cost per person is under £150, the event qualifies as a 100% tax-deductible staff welfare expense under Corporation Tax.
Can You Reclaim the VAT?
You can reclaim VAT on a staff party, but you must follow the strict rules HMRC enforces. Unlike Corporation Tax, where you can deduct the entire bill, even if additional guests are spouses, attend the event. VAT can only be reclaimed on an event that is only attended by your employees.
Understand Your Business’s Rights With Tax Driven Accountants
As a business owner, it can be difficult to keep track of the deductibles that you’re entitled to, which is why working with an accountant is so important. An accountant takes care of all of your financial stresses and ensures that you are making the most of the tax deductions that you’re entitled to.
Need advice about the £150 party allowance HMRC provides or looking for a new accountant? Get in touch with the team today.
