Can I claim a Christmas party as a business expense?

Love them or loathe them, Christmas parties are a fantastic way of rewarding yourself and your employees for a year of hard work.

Because they aren’t total Scrooges, HMRC provides added incentives to limited companies (unfortunately, not sole traders) putting on a Christmas party for employees.

The parties will be exempt from tax and National Insurance, but there are some strict rules, including the following:

• The party can’t cost more than £150 (including VAT) per person
• The party must be an annual event, such as a Christmas party or summer party
• The party must be open to all of your employees (and must consist mostly of employees)
• Shareholders are not included in the exemption if they aren’t employees or directors

You can also claim an additional £150 (including VAT) per person for a plus one for each employee, providing they are a family member or partner.

Exemption, not allowance

It’s important to remember this is an exemption, not an allowance. You MUST come in under the exemption limit for it to apply. If your party costs £151 (or more) per person, you won’t be able to claim the first £150 as a business expense – the whole thing will be taxed as normal.

The exemption also spans the whole year, so the combined cost (per person) of all parties in a single year can’t exceed £150 per head including VAT.

What about a virtual Christmas party?

The pandemic forced us to rise to a number of unexpected challenges, but one that few of us gave much thought to was the future of the office Christmas party. But is it even possible to claim for an online Christmas party?

Well, the short answer is yes! But as always, the devil is in the details, so let’s take a look at the long answer, just to be safe.

Everything we’ve already mentioned in regards to traditional, in-person Christmas parties applies to your virtual Christmas party. However, with a virtual event, we recommend you find a way to prove how many people attended, as HMRC may ask you to provide evidence that the party qualifies under the annual function exemption (and meets the requirement of being made available to everyone).

If your virtual Christmas party includes a structured entertainment online event, such as a musician, magician, Christmas quiz, or even - as was the case at a Crunch Christmas party one year - the CEO threatening to dress up as Noddy Holder, this will go a long way in demonstrating to HMRC that the party qualifies.

Given the logistical difficulty of providing meals and drinks to your employees with your £150 per person quota, one tempting option could be to provide your employees with the £150 and ask them to reclaim their purchases as an expense. We wouldn’t recommend this though since, in the event of an HMRC investigation or audit, it could be difficult to prove that all these individual expenses were for one organised event. 

We’d suggest it would probably be better to buy and send a sort of “Christmas party hamper” of some kind to your employees to enjoy during the party instead.

However, if you do opt for a Christmas hamper, you need to ensure you don’t forget about the rest of the organising! If you simply send everyone a hamper without a party, this would not qualify for the exemption. If you just want to send out a gift to everyone without the organised event, you could do this under existing trivial benefit rules. These allow employers to provide a gift up to the value of £50 including VAT without paying tax on the item. To qualify, the gift cannot be cash (or a voucher that can be exchanged for cash) and it cannot be in exchange for work or performance.

If you were feeling really generous to your employees, you could even consider using both!

How do I claim the exemption in Crunch?

If you’re a Crunch accounting client then simply record the cost of the party as a Staff Welfare Expense in Crunch and you’re good to go. Don’t forget to scan and upload any receipts or invoices for secure storage.

If you want to learn more about business expenses, including what you can and can’t claim, check out our free Business Expenses guide.