Having been significantly disrupted last year by Covid-19, no doubt we are all looking forward to a more normal Christmas this year. Many will soon be organising the staff Christmas party, which can present an excellent opportunity to enhance staff morale and motivation, particularly following the recent difficult period.
It is good news that the cost of a staff Christmas party can typically be claimed as an allowable business expense. To be exempt, and not have to report anything to HMRC or pay tax and National Insurance, the party (or similar social function) must:
- be open to all employees. If your business has more than one location, an annual event that is open to all staff based at one location still counts as exempt. You can also put on separate parties for different departments, provided all employees can attend one of them.
- be annual (such as a Christmas party or summer barbecue).
- cost £150 or less per person. This limit can cover multiple events, if the combined cost of the events is no more than £150 (VAT inclusive) per head. The total cost of the party is the whole cost of the event, from the start to the end. It includes food, drink, entertainment, taxis home, overnight accommodation, etc. The limit of £150 per head is calculated based on all those attending the function, not just employees.
So, if employees can bring guests, the total cost should be divided by the total number of employees and guests attending. While it is hoped events will be in person this year, it is useful to note that this also applies to online or virtual parties.
Typically, the VAT can be claimed in full on staff entertaining costs. However, please note that the definition of employees for VAT purposes does not include partners/spouses of staff or former employees.
Therefore, if guests are invited it will be necessary to apportion the relevant costs appropriately. Please also note that 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.
You may also be thinking of rewarding staff with a Christmas gift. Presents paid in cash to staff will be taxable as earnings in the normal way (subject to tax and national insurance). The same tax treatment also applies to vouchers exchangeable for cash, with the employee taxed on the full value of the voucher.
Vouchers exchangeable for goods and services only (non-cash vouchers) are also taxable and must be reported on the employee's form P11D. Class 1 national insurance will normally need to be deducted through the payroll.
However, you may wish to give employees a seasonal present, such as a turkey, a bottle of wine or box of chocolates. Provided the cost of the gift is 'trivial' - typically less than £50 a head - the gift will usually not be taxable.
Keeping fingers crossed for a happy festive season.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.