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17 December 2019

‘Tis the season to be jolly…but what about tax!

Tax Tips – Business Question:

I run a construction company and we are having our staff Christmas party next weekend to thank the staff for all their hard work throughout the year. I plan to pay for all the costs of the event and I would like to understand the tax implications for my company?

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This is a very common question at this time of year as a Christmas party for your staff is not only good for your staff’s spirits but may cost you less than you think. Many employers use the annual Christmas party as a way of thanking staff for their commitments and efforts during the year.

Although there is no specific allowance for a Christmas party or other morale boosting events, HM Revenue & Customs (HMRC) does offer a business limited tax relief for the cost of hosting an ‘annual event’, if certain criteria are met.

A business can provide an annual event for its directors and staff and reclaim the costs and the VAT. If other people attend such as customers or suppliers, the treatment is not as straight forward. Provided the cost per head is not more than £150 (including VAT), the staff member will not suffer any tax on the event. The event also needs to be open to all staff. It can be restricted to staff working at just one location, but it cannot be restricted to certain staff, such as management only.

Should you wish, you can also hold several events throughout the year, but bear in mind that the total claim for all events must not exceed the £150 (including VAT) annual threshold. The cost per head can include food and drink, transport and even accommodation, but must not go over the strict £150 threshold. A simple way to work out the cost per head is to divide the total cost of the event by the total number of people who attend.

The full cost of the party will be disallowed for tax purposes if it is found that the entertainment of staff is incidental to that of entertaining customers.

Parties covered by the £150 exemption do not have to be reported on form P11D. If you do exceed the limit, and have created a taxable benefit in kind, you might consider settling it using a PAYE settlement agreement where the employer agrees to pay the employees’ tax and NICs.

Outside of this specific annual event exception, staff entertainment is regarded as a ‘Benefit in Kind’, and directors and staff would need to pay tax on the amount of the benefit. This means you may want to think again before taking your staff out for an impromptu celebration and then trying to reclaim the cost.

An employer must take reasonable care to calculate the annual cost per head of events. I recommend you keep sufficient records to prove to HMRC, if required to do so, the numbers attending any event so that the cost per head can be calculated.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

Contact Feargal

Feargal McCormack / Managing Director

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