Many businesses celebrate Christmas by holding a party for their workers, but this can be expensive, especially if food and drinks are free for participants. To make the financial blow easier, many of the expenses of a Christmas party can be entered as business expenses on a company accounts and will attract tax relief.
Normally, entertainment and food is viewed by HMRC as “benefits in kind” for employees who will then be liable to pay tax on the benefit. The one exception is the tax-free allowance for an annual function. Though the tax regulations do not identify this annual function as a ‘Christmas party’ specifically, most businesses use the allowance for this purpose
Before you go ahead and order the caviar and vintage champagne, you need to be aware that the allowance is restricted to £150 a head including VAT. Covered by this £150 is accommodation, food, drinks, and transport.
If you decide to hold the event for senior management only, then this will be ineligible for the tax allowance. HMRC state that the function must be open to all staff as well as invited guests. The function can be split between two or more sites if the business operates in different regions.
If you are a committed Scrooge, there is a loophole in the regulations that means you do not actually have to hold a Christmas party to claim the £150 a head allowance. Simply enter a cash sum of £150 per employee in your business accounts.
The £150 figure was introduced in 2003 and has not risen since. If the figure had risen at the same rate of inflation, it should now be £215.
As usual with tax, regulations that cover the function allowance are not simple. HMRC has a section on its website dedicated to the subject (https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21690). The site provides detailed scenarios of function types with a breakdown of costs and how they would qualify for the tax allowance, perhaps making it easier to work out how your own plans fall into HMRC’s guidelines.
If you are in doubt about what is and is not covered in the function rules, consult an accounting service that can provide expertise on business taxation.
If you have been hesitating about organising a company Christmas party, then knowing that you can claim the cost as a business expense may persuade you to celebrate this time of year in style with your employees and clients.