By Niamh Tracey | 12 December, 2023

Q&A: do I have to pay tax on office Christmas party?

In this week’s Q&A, we look at potential tax pitfalls when planning a staff Christmas party from the expenditure limit on costs per head, guest lists and frequency of celebrations.

My client is holding a staff Christmas party this month and also held an annual staff summer event. Therefore, will the Christmas party now become a taxable benefit each year and not benefit from the exemption?

Section 264 ITEPA 2003 details an income tax exemption for annual functions. The exemption is not restricted only to a Christmas party, it can used for alternative annual functions during the year.

The exemption must be used for annual functions so for functions that can happen again the following year. For example, the exemption cannot be used for a one-off function such as the 10th anniversary of a business.

Another condition of the exemption is that the function must be open to all employees or all employees in one particular location.

The total value for an annual function which is exempt from income tax is £150 per head.

ITEPA 2003 s264(3) explains that if more than one annual function is held within in a tax year, the cost of both functions will remain exempt from income tax as long as the combined cost per person for both functions does not exceed £150 per head.

For example, if the client’s summer party cost was £50 per head, then as long as the cost per head at the Christmas party was £100 or below then both parties would be exempt from income tax as the combined cost of the parties per head is exactly £150.

If the combined cost does exceed £150 per person, then only one function cost will qualify for the exemption. The whole cost of the second function would become a taxable benefit to the employees, not just the excess above £150.

Therefore, if the combined £150 per person limit is breached, the benefit of the second function needs to be reported to HMRC.

This can be done via payrolling the benefit if the client has registered for this or by submitting a P11D form for each employee that attended.

Alternatively, the cost of the second function could be reported on a PAYE settlement agreement with the approval of HMRC so the employee is not impacted by an additional taxable benefit.

When calculating the cost of the function per head, the VAT and the cost of transport and/or overnight accommodation if the employer is providing this must also be included. The total cost of the function can be divided into the total number of attendees including non-employees to arrive at the cost per head.

Further information can be found in HMRC manual EIM21690.

Credit to Accountancy Daily.