HMRC have a secret festive loophole, which accountant Rachel Harris describes as "the £150 party rule that no one uses properly." But, as she says, there's a golden rule that voids the whole deal.
She says: "Most directors don't actually realize that HMRC really encourage you to throw a Christmas party.
"As long as you follow one rule, every limited company gets a £150 per head allowance for staff events that is completely tax free, that includes the food, the drink, the entertainment and even the travel home."
"But if you go one penny over 150 pounds per person, the whole thing becomes taxable."
There's another key rule too - "The party must be open to everyone on the team, not just the directors". So, to make sure it's legal - everyone needs an invitation.
And, there's more good news, she says: " you can even hold more than one event per year, say, a summer barbecue and a Christmas dinner, as long as the total stays under £150 per person across the year, so you can enjoy the festive season whilst reducing your tax bill."
HMRC Christmas party rules explained
According to HMRC's rules, to be exempt, the party or similar social function must:
- be open to all your employees
- be annual, such as a Christmas party or summer barbecue
- cost £150 or less per person
- This also applies to online or virtual parties.
Multiple annual events costing less than £150 per head combined
As long as the combined cost of the events is no more than £150 per head, they’re still exempt.
You do have to report how much social functions and parties are worth to each employee if they are a part of a salary sacrifice arrangement.
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So it can be an online party, or several parties across the country?
According to HMRC's detailed guidance: "Where an annual function is provided virtually using IT then the exemption is capable of being met provided all other conditions are also satisfied as the exemption applies to allow for costs of provision which are generally incurred for the purposes of the event itself."
In the example given by HMRC: "A company holds one annual function in a tax year and does so virtually using IT. All employees are invited and each is provided with a hamper consisting of some food and drink to be enjoyed by the attendees during the party.
"The total cost per head is £100 which is within the £150 exemption and so the exemption applies."
Similarly, the notes say: "If your business has more than one location, an annual event that’s open to all of your staff based at one location still counts as exempt. You can also put on separate parties for different departments, as long as all of your employees can attend one of them."
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