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How to have a tax exempt Christmas party

The Christmas Office party is a welcome chance for a lot of employees to let their hair down and have some well deserved fun. Even better as an employer you might not have to report anything to HM Revenue and Customs (HMRC) or pay tax and National Insurance.

To be exempt, the party or similar social function must:

  • · the event must be open to all your employees
  • · it should be an annual event such as a Christmas party or summer barbecue
  • · the cost must be £150 or less per person (inclusive of VAT)

This exemption also applies to online or virtual parties.

The cost per person should include:

  • · Entertainment
  • · Food and drink
  • · Transport and accommodation that enables an employee to attend
  • · VAT

The total cost should then be divided by the number of employees and guests to get the per person cost.

If your business has more than one location, and an annual event at one location is open to all staff that counts as exempt. You can also put on separate parties for different departments, as long as all of your employees can attend one of them.

Multiple events are also exempt so long as the combined cost of the events is no more than £150 per head. If the cost exceeds this amount, then the full costs will need to be reported.

The cost of employee entertaining is an allowable expense for corporation tax so the cost of the staff Christmas party can be deducted.

Input tax on employee entertaining is generally recoverable however, the definition of employees does not include partners of staff or former employees. Therefore, if guests are invited the costs will need to be apportioned accordingly.

If an event is provided only for directors, partners, or sole proprietors, HMRC will not accept that input tax has been incurred for business purposes.

If all of criteria isn’t met, then a taxable benefit in kind will arise.

The benefit must then be reported on each employee’s form P11D. The employee will pay income tax on the benefit, and the employer will be charged Class 1A national insurance.

Please note that the £150 per head limit is not an allowance it is an exemption– so even if you just go over the limit of £150 then the full cost will become taxable.

Now go and have some fun.

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