(This article was checked in October 2019 and is still relevant.)

TLC Loves… Christmas parties and tax breaks

Christmas parties will be happening all over the UK this week and next as companies and colleagues take the opportunity to relax a little.

But have you made sure you’re able to get a tax break on the cost of your company’s Christmas do? Here our tax expert, Claire Turner, takes you through the ins and outs of making the most of that expense.

Understand the budget

You need to think about the tax implications for both the company and any employees (if applicable). A Christmas party could be seen as a taxable benefit, but employees get an exemption for up to £150 (inc VAT) for what HMRC call “annual functions”. If you spend over that amount, they’ll be taxed on the total and it will need to be shown on a P11D. This is particularly relevant if you’re the only employee of your business.

However, a company can claim unlimited “employee entertainment” as an allowable expense against profit, so if running a limited company you’ll effectively get 20% Corporation Tax relief on whatever you decide to spend. For sole traders or partnerships you can also offset the expense against profit and are saving the tax at whatever rate you pay – that could be 20%, 40% or 45%.

Know the rules

As ever with HMRC there are some criteria to fulfill to ensure your employees can get the exemption.

In order for the expense to be allowed your Christmas party must be:

• Regular – you should do it every year to ensure it qualifies
• Open to all – every employee must have the chance to go. Multiple locations are fine to cater for those businesses with a workforce that’s spread out
• Only £150 per person

As long as your Christmas party conforms to these rules your employees won’t be taxed on the £150.

It’s never too late

Not booked your Christmas party yet? You’re in luck. The £150 counts towards all annual events, so you could spend it on an event in January or later in the year. You could even split it across more than one event, just make sure you don’t bust the budget or your employees will be taxed on the whole amount.

And it doesn’t just have to be spent on a traditional meal and drinks. You could get creative and go Segway riding, paint-balling or even to a spa. As long as your event conforms to the rules above you can claim the exemption.

For expert advice on your situation, give Claire a call. Wishing you a wonderful Christmas and a prosperous New Year from the TLC team.