What are the Tax rules for office Christmas parties?
With the festive season fast approaching and the return of the long-awaited social gatherings, we have seen a large spike in the number of clients contacting us to enquire about the tax rules for office Christmas Parties.
As an employer providing social functions and parties for your employees, you have certain National Insurance and reporting obligations.
What you need to report and pay depends on:
- – if it’s an annual event
- – if it’s open to all of your employees
- – if it costs more than £150 per head
- – how many events you provide during the tax year
- – whether the employee is a director, and how much they earn
Exemption not allowance
The figure of £150 is not an allowance. For functions that are outside the scope of the exemption (see example at EIM21691) directors and employees, except for the tax year 2015 to 2016 and earlier those in an excluded employment, are chargeable on the full cost per head, not just the excess over £150, in respect of:
- – themselves and
- – any members of their family and household who attend as guests.
The cost of the function includes VAT and the cost of transport and/or overnight accommodation if these are provided to enable employees to attend. Divide the total cost of each function by the total number of people (including non-employees) who attend in order to arrive at the cost per head (see examples at EIM21691).
You might not have to report anything to HMRC or pay tax and National Insurance. To be exempt, the party or similar social function must:
- – be open to all your employees
- – be annual, such as a Christmas party or summer barbecue
- – cost £150 or less per person
Where an annual function is provided virtually using IT then the exemption is capable of being met provided all other conditions are also satisfied as the exemption applies to allow for costs of provision which are generally incurred for the purposes of the event itself.
Separate locations and departments
If your business has more than one location, an annual event that’s open to all of your staff based at one location still 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 annual events costing less than £150 per head combined
As long as the combined cost of the events is no more than £150 per head, they’re still exempt.
Salary sacrifice arrangements
You do have to report how much social functions and parties are worth to each employee if they are a part of a salary sacrifice arrangement.
What to report and pay
If any of the events you provide aren’t exempt, you’ll have to report the costs to HMRC and pay National Insurance on them.
- – report on each employee’s form P11D
- – pay Class 1A National Insurance on the full cost of the event
We cover P11D’s in a separate article here.
Multiple or more annual events costing more than £150 per head combined
If any of the events cost less than £150 per head, you may be able to count these costs as exempt. But you cannot do this if you’ve already used up the £150 exemption on another event. See an example of this.
However, you’ll have to report and pay on the full costs of any additional events that go over this limit, even if they cost less than £150 per head on their own.
We, at MCL Accountants, think that as Christmas approaches, it’s time for the government to show a bit of goodwill to firms, employees, and the hospitality industry. The current VAT inclusive limit of £150 has been in place since 2003 and is ‘massively out-of-date’ and after the Covid-19 pandemic, changing the limit would also provide businesses, particularly in the hospitality sector, with some ‘much needed support’ as they continue to try and recover.
How can MCL Accountants help?
Contact MCL Accountants on 01702 593 029 if you have any queries on Tax rules for office Christmas parties or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.