It's party season but do you know the rules on how to treat the costs you incur?

christmas party (cropped)

Basic rules

For the cost of your company Christmas party or similar social function, to be exempt from tax and National Insurance,  ALL of the following rules MUST apply:

  1. You can only spend a total of £150 or less per head. These costs include VAT, transport and overnight accommodation (if applicable)
  2. It must be an annual event, like a Christmas party or Summer BBQ
  3. It must be open to ALL employees.
IMPORTANT - The £150 cost per head is limit, NOT an allowance and members of family and households who attend as guests, can’t be included. The cost for them will need to be reported to HMRC. 

How to calculate the cost per head

Take the total cost (including VAT, transport and overnight accommodation if applicable) and divide by the number attending.

IMPORTANT - If this is more than £150 per head, the FULL benefit must be reported to HMRC.  Remember, the £150 is not an allowance.

Example
You hold a Christmas party for your 5 members of staff and the total cost including VAT and transport is £800.
Therefore, the cost per head is £160 (£800/5)

What do I need to report to HMRC?

  1. Report the £160 benefit of the Christmas party on each employee’s P11D
  2. Pay Class 1A National Insurance on the FULL cost of the event

What if you have more than one business location or department?


As long as the event is an annual one and it is open to all employees within that location or department, you can still claim the expense (up to £150) for each separate party. 

What if you have both a Christmas party and a Summer BBQ (or other annual event)?

You are not expected to keep a running total, employee by employee and of each function attended BUT you must calculate the cost per head of each annual event.

As long as the total of the annual events don’t cost more than £150 per head and the events are open to all employees, the cost is allowable.

Example
You hold a summer BBQ for all your 10 employees and the total cost is £500. Therefore the cost per head is £50.

You then hold a Christmas party for all your 10 employees and the total cost is £800.
Therefore, the cost per head is £80.

Total cost per head for both events is £130 (£50 + £80), which is below the limit. There is nothing to report.

Same example but with higher costs
This time, the cost of the summer BBQ is £600 instead of £500.
Therefore the cost per head is £60.

The Christmas party is now £1,000 instead of £800.
Therefore, the cost per head is £100.

Total cost per head for both events is £160, which is above the limit.

In this instance, you have the option to decide which event is going to be considered as allowable and which will need to be reported to HMRC. I would suggest that the summer BBQ at a cost per head of £60 is reported.

What do I need to report to HMRC?
Assuming you have decided to consider the Christmas party as exempt event, for all employees who attended the Summer BBQ, you will need to:

  1. Report the £60 benefit of the summer BBQ on each employee’s P11D
  2. Pay Class 1A National Insurance on the FULL cost of the event 

What if I have a directors only event?

As this event is NOT open to all employees, the cost of the full benefit will need to be reported to HMRC.

Summary

As long as you keep the total cost per head to £150 or below, that the event is an annual one and is open to all employees, you won’t have anything to report or pay to HMRC.

Enjoy the celebrations!

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