Tax and your work Christmas party

11 December 2023

• Tax

As 2023 draws to a close, many employers will be looking for ways to reward their teams’ hard work. But how can you do that in a tax-efficient way that benefits both you and your employees?

Thankfully, showing your appreciation doesn’t need to cost the earth. In most cases, work Christmas parties are tax-deductible. However, it’s essential to understand the tax rules surrounding annual events. 

The tax treatment of work Christmas parties

Limited companies can often claim the cost of staff Christmas parties as an allowable expense. That means you can celebrate with your employees, boost morale and minimise your corporation tax bill all at once. To understand the tax treatment of your staff Christmas party, you’ll need to consider the following:

How much did it cost?

Ideally, your Christmas party should not cost more than £150 per head, including VAT. Exceeding this threshold may impact any attending employees (including yourself), as the entire cost of the event will be treated as a benefit-in-kind (BIK) for tax purposes. This limit will include the Christmas party, the summer barbeque and other similar functions. Once you spend over £150 per head per annum, the whole amount becomes taxable, not just the amount over £150, so be careful. The £150 limit also applies to guests attending. 

VAT

As mentioned above, you’ll need to include VAT when working out the cost-per-attendee. However, VAT-registered businesses may also be able to claim a VAT refund on goods and services purchased for the event.

Be aware that claiming a VAT refund may be more complicated if partners and family members of your employees also attend the event.

What happens if I overspend?

Don’t panic if you overspend on Christmas festivities or inadvertently provide a taxable benefit to your employees; you may be able to set up a PAYE settlement agreement (PSA) with HMRC.

A PSA allows employers to pay tax on certain benefits on an employee’s behalf, so they don’t need to foot the bill themselves. These arrangements can also significantly reduce your administrative burden.

If you don’t already have a PSA in place for the 2023/24 tax year, you must apply for an arrangement by 5 July 2024.

Talk to us

If you would like more information or any advice on how to avoid tax exposure when arranging the staff Christmas party, or for any other tax-related matters, get in touch on 01788 539000 or 0116 2610061.