Are Christmas party expenses tax deductible?

Christmas is a great time to celebrate for many businesses. It’s the end of the calendar year, and - for many firms - their financial year. So, a moment to recognise business and personal achievements and draw the year to a close.

When all the Christmas crackers have been pulled, and the festive music has stopped, the question remains – who’s paying for the business Christmas party and are the expenses tax deductible?

What are the rules for deductible expenses for Christmas parties? 🎄

Guidelines for employee parties are part of a broader set of regulations on business entertainment expenses. Our friends at His Majesty’s Revenue and Customs (HMRC) have laid out some specific rules on employee parties. 

It’s worth looking at the details, but in summary, parties for employees are allowable expenses, so exempt from employers’ National Insurance and tax so long as they: 

• are open to all of your employees; 

• are an annual event, so a Christmas party (or perhaps a summer barbecue); 

• cost £150 or less per person.

Do the tax rules for employee parties apply to online parties? 🧑🏽‍💻

It’s worth noting that the requirements apply not just to in-person parties but also to online or virtual events too. 

Who do employee party expense rules apply to? 💃🏻

There are a few things to remember. The primary purpose of the party needs to be your employees not your clients, or your party will not qualify for the tax relief. 

From an HMRC perspective, the exempt party expenses can only apply to employees on your payroll. So, this does not include previous employees, contractors or shareholders who don’t actually work in your business. Their party costs are not deductible. 

Within the overall costs, allowable expenses would include food, drink, entertainment, venue hire, transport and overnight accommodation. And if your company is VAT-registered you can also recover the VAT paid on these allowable staff entertainment costs. 

The limit of £150 per employee is strictly applied by HMRC. If the total is a penny more than this, then none of the cost will be allowable as tax deductible, so be sure to budget accordingly. 

What if my business hosts several Christmas parties, for different sites? 🕺🏽

Your firm might operate across different sites, so you might choose to hold separate parties. The tax-exempt status applies to the various locations providing that all of your employees are allowed to come to one of the parties. 

Or, you may want to host different parties for various departments based at the same business site. That’s permitted too.

What if we prefer to divide our tax-free party allowance across more than one event? ⛱

The allowance of £150 per employee is called the Annual Party Exemption. What’s helpful is that, if you want to celebrate on a smaller scale, and more frequently, the allowance of £150 per employee can be applied across several events in the same tax year. So, perhaps a Christmas party and a summer barbeque.

Remember, the financial formula for a successful employee party lies in understanding your allowable costs. Enjoy your party time together.

Disclaimer: This is not legal, accounting, or tax advice - it's simply a guide. If you need help, check with your accountant or contact HMRC directly.