Enjoy the office Christmas party, but remember to claim tax exemption!

Many companies will be celebrating another year’s hard work with a Christmas party this month, but a number of firms are still failing to remember that a generous tax exemption applies to annual parties.

‘Annual’ parties – such as a Christmas event – can qualify, but the amount that can be claimed is capped at £150 per staff member.

If the cost of a qualifying party goes above the £150 per head threshold, however, then all the costs incurred are taxable as a benefit-in-kind on employees. It is important to note that this financial limit must include the whole event, from the start to the finish, including those early morning taxi transfers, overnight accommodation, and VAT.

Importantly, the £150 per head limit applies to everyone attending the function, not just employees, which is something to bear in mind if they bring guests.

VAT rules also need to be considered. If employees’ guests are invited to the event the input tax has to be apportioned, because the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed.

If entertainment is only being provided for directors, partners or sole proprietors, HMRC does not accept that the input tax has been incurred for business purposes. However, if directors attend parties along with other members of staff, then the VAT on the cost of attendance is not blocked from recovery.

Cash Christmas presents to employees remain to be taxable along with other earnings. The same treatment also extends to vouchers that can be spent in either one or a number of different shops of the employee’s choice. (The employee has to pay tax on the full value of the voucher.)

So, be sure to have a very Merry Christmas, but remember to maximise your financial benefits!