Are Christmas staff parties tax deductible?

Are Christmas staff parties tax deductible

With Halloween behind us, thoughts are now turning to Christmas. If you’re a business owner, especially if you’ve recently hired staff for the first time, you might be wondering if Christmas staff parties are a tax-deductible cost.

Are staff parties a tax-deductible cost for businesses?

Staff entertaining costs, including staff parties can be deducted from profits before you calculate your Corporation Tax. However, staff parties have a tax exemption which has implications for how you manage the spend.

Allowance vs exemption

Many tax allowances give you a tax-free amount before you start paying tax. For example, the income tax personal allowance of £12,570 (2023/24) means the first £12,570 is free of tax and then you pay tax at 20% on the next £37,700. The exemption on staff parties tax works differently. If costs exceed the exemption threshold, the entire cost is taxable.

How much can I spend on staff parties?

The exemption is set at £150 per head per year. This can be spent on one or more annual events. If you spend even a penny over £150, the entire cost becomes taxable. The £150 includes all costs incurred including travel, accommodation, entertainment and VAT. Staff can also bring a plus one and their cost is also tax-deductible.

What are the other criteria to get an office Christmas party tax deduction?

  1. The party must be open to all staff (not just all directors)
  2. The party must not be incidental to other entertaining (such as for clients)
  3. The party must be an annual event but summer parties also attract the exemption.

Are there tax implications for staff?

The annual company staff party is not classed as a benefit in kind if it falls within the £150/head limit so you do not need to report it on your PSA or P11Ds. If the cost is less than £150 there will be no tax or NI implications for staff.

Can staff pay towards the event to bring it down to £150?

No, you cannot ask for a contribution. If the cost exceeds £150/head, the entire cost is taxable.

What are the tax reporting requirements for staff parties?

If the cost stays below £150/head, you are not required to report it to HMRC. However, as will all business costs you should keep paperwork so you can prove exemption if you need to. If the cost exceeds £150, you will need to report the costs on your staff’s P11D and ensure that you do not deduct it from your profits before calculating your Corporation Tax liability.

What about staff Christmas gifts?

Under the trivial benefit rules, you may make small gifts of up to £50 to staff and these are tax-deductible.

According to HMRC, an employee benefit is ‘trivial’ if it:

  • costs you £50 or less
  • isn’t cash or a cash voucher
  • isn’t a reward for their work or performance
  • isn’t in the terms of their contract

And finally, what about gifts to clients?

Gifts to clients are generally taxable with a few exceptions:

  • Merchandise displaying your logo and name costing under £50 can be given to clients as a tax-deductible gift. Examples could include mugs, notepads, USB sticks, golf umbrellas, backpacks etc. You cannot give gifts of drink, food, tobacco or an exchangeable voucher.
  • Stock can be gifted to clients, but the product must usually be given away during the ordinary course of business. e.g. free samples.
  • Gifts on sale – you can offer a free gift as part of a sale to a customer and the cost of this gift would be a tax deductible expense.

Need a helping hand with your accounting?

Sometimes it can be confusing to keep up with all HMRC’s rules and regulations, particularly around tax-deductible expenses. But don’t worry – Adams Accountancy is here to keep up to date on your behalf. For a free no-obligation chat, call us on 01322 250001 today.