Christmas Parties 101: How much is tax deductible?

Here at eve, we consider ourselves festive aficionados — our job is to find the best Christmas party venues out there and when it comes to the most wonderful time of the year, we really know our stuff! In our opinion, there are hundreds of reasons to throw a Christmas party, from celebrating your employees’ hard work to just getting together to see each other after months (and months!) of remote working. The list goes on: mince pies, cheesy music, tinsel, turkey and… tax breaks?

Chances are, if you’re thinking about hosting a company Christmas party this year, you might not have considered that your merry making is actually tax deductible. We’ve reached out to the accountancy experts at WWCreative to help shed light on the current rules, how to apply them, and some common (and potentially costly) mistakes. Go on, grab yourself a cuppa and/or hot chocolate eventprofs — this is one to keep bookmarked.

So… is my Christmas Party tax deductible?

In a nutshell: yes, it is. However, before you start stocking up on caviar and crystal baubles, there’s several key conditions your party will need to meet in order to qualify for a tax break. We interviewed Shuang Man, an ACCA-qualified accountant at WWCreative, to find out what sort of criteria needs meeting.

Notepads at the ready — according to Shuang, these are the three main points for your checklist:

1. The total cost can’t exceed £150.00 per head 

This is crucial (and might make you think twice about buying those personalised Christmas hats…). £150.00 must cover everything, including transport, venue, catering, accommodation, decorations etc. Should the gross cost go over the equivalent of £150 per head, then the whole amount becomes taxable for both you and your employees as benefit in kind. If your total expenses work out at £180 per person, you’ll be taxed on the full amount, not just the extra £30.

2. It has to be an annual event

Call it the Christmas catch. £150 per head encompasses all events across the year. Love a summer garden party? So do we (we even wrote this blog about them!). However, if you’re looking to throw a winter ball as well as a summer party, the total cost for these events must stay under the magic £150. Alternatively, if your company’s summer BBQ works out at £75 pp, and your Christmas party costs £105 pp, you can claim for just the latter — but bear in mind the summer BBQ expenses would still be taxable.

3. Your Christmas party must be open to all

Employees have to be at the heart of your celebration, and, for the party to be eligible for a tax break, everyone must be invited: ‘it can’t be an ad-hoc event exclusive to certain individuals’, says Shuang. If it’s exemption you’re after, a senior members-only lunch is a no-go. Of course, you can also invite clients or customers — it is the season of goodwill, after all! — but the costs incurred as a result will be liable for tax; only the staff portion (provided it’s less than £150 per head, per year remember) is tax deductible.

The Plus One Problem

We asked Shuang how allowing employees to bring a spouse or partner would work within the context of these conditions. It’s possible, but you’ll need to be careful. Say you’ve calculated the net total for your Christmas extravaganza to be £100 per head, per year. So far so good. However, if an employee brings a guest, the cost of the employee effectively doubles to accommodate the extra person. That takes you to £200 pp per year, which is more than the £150 threshold, and — you guessed it — the whole amount becomes fully taxable.

That said, some companies want to allow their hardworking employees to bring a guest minus this less-than-festive liability. If a business knows that, in all likelihood, their Christmas party will cost more than £150 pp per year, they can set up an arrangement with HMRC in advance: the company makes a single annual payment to cover all the tax and NI due on irregular expenses or benefits. This is called a PAYE Settlement Agreement (PSA) and means employees won’t be out of pocket. Time to dust off those matching Santa suits…

What about VAT?

So you’ve booked your restaurant, sent round the menus, and have already started fantasising about the fondant puddings — but what about VAT? You might be wondering whether this falls under the tax break umbrella, too. The good news: it does, and you can claim it back. The caution: all the conditions must still be met in full. It’s got to be factored into the overall cost — and stay under the annual £150 threshold — and, as above, your Christmas dinner must be open to all employees.

Clients coming too? Remember, only the employee portion is tax exempt. Shuang gave us an example: ‘A company might have 100 people coming to their Christmas party. If 80 of these guests are employees and 20 are clients, the company can therefore claim back 80% of the total VAT. The remaining 20% (i.e. the client portion), however, won’t be tax deductible.’

Common mistakes and how to avoid them

Other than exceeding the golden £150 pp per year, where do people go wrong?

1. (Mis)understanding “entertainment” 

‘Most people find the concept of “entertainment costs” really confusing’, says Shuang. ‘They can’t distinguish what’s classed as an allowable expense and what isn’t. When it comes to parties, people often think this covers client entertainment too. Businesses assume that just because it’s a work social function, it must be tax deductible, and arrange branded events for clients on this basis. In reality, this wouldn’t be eligible for a tax break; the company couldn’t claim back VAT on the restaurant bill, either. Only employee entertaining costs are allowable (again, provided the criteria are met).

2. Treating exemption as allowance

It may sound obvious, but you have to spend the money before you can claim it back. HMRC isn’t going to be handing out cash in advance of your Christmas party; you’ve got to hold the event first!

A top tip from WWCreative: keep a record. The more detailed the better. Specify which event(s) you are treating as allowable expenses and keep a cost breakdown of your outgoings (yes, even the karaoke machine). Everything must be disclosed correctly — HMRC will sometimes perform random checks, so it’s best to be prepared.

3. Forgetting to get your PSA approved

Remember those PAYE Settlement Agreements? Unlike tax breaks for parties, these need to be approved by HMRC before 6^th April for the financial year. Make sure you’ve filled in the relevant forms and submitted these for approval by HMRC in plenty of time, otherwise your plans to spread a little festive cheer this year will fall very, very flat.

Going virtual

If 2020 has taught us anything, it’s that these are unpredictable times. If you’re planning on playing it safe this December and organising a virtual party — online Christmas cook-along, anyone? — then you’re in luck! Virtual social functions are also tax deductible, as long as you’re under the annual threshold, and the (Zoom) invitation is open to all employees.

The take-home message

Unless you’re looking to set up a PAYE Settlement Agreement, you don’t need to seek approval from HMRC prior to decking the halls. However, we’d definitely recommend speaking to an accountant or advisor beforehand. ‘An open and clear communication with an accountant is really helpful,’ advises Shuang. That way, you can hand over your record of allowable expenses (your accountant will then submit the claim to the Tax Office), sit back, relax, and enjoy the festive season. After all, if there’s ever been a time to celebrate, it’s now!