Christmas parties are a great way to let off some steam at the end of a busy year. But if you’re not careful, hidden tax costs can make for a much more expensive celebration than you first expect. 

We all look forward to Christmas party season. But company parties can be tricky – and not just because of the tradition for at least one employee to behave inappropriately after one too many free drinks. In fact, the amount a company spends on the festivities can be a point of great debate.

Employees want to feel rewarded for their hard work all year with a generous celebration. If they feel the firm is being stingy the resulting upset can cause management a headache that has nothing to do with any hangover.

But businesses should think twice before letting the good times roll too far – and not just because an open bar is the surest route to aforementioned drunken debauchery. In fact, HMRC can bring some severe consequences upon companies that exceed the £150 permissible allowance per employee per year for staff events.

The Christmas party could cost your business a lot more than you think

Often companies simply book out a luxury hotel. The rule is that all is well as long as the food and drinks bill comes to less than £150 per person. But people also expense other costs such as their hotels and train fares. Companies often overlook the fact that if this total exceeds £150 it becomes a taxable benefit on the employee.

Technically, this cost should go on an employee’s annual tax return: their P11D. But if a business had to put this on someone’s P11D few people would attend the party. Think about it, would you? So most companies put it on their PAYE Settlement Agreement instead, and carry the costs themselves.

What happens if costs exceed the £150 limit?

For each employee who pays tax at the 40% rate, going over the £150 limit (theoretically, even by a single pound) costs your company approximately 90% more: nearly double the entire initial outlay. In other words – if your company spends £200, it doesn’t just pay the extra £50. This means that a £200 per head employee Christmas party (and don’t forget – this cost includes VAT as well as the drinks, transport and accommodation) can end up costing your company £380.

So how can you avoid ending up on the tax-man’s naughty list this Christmas? Here are a few tips.

Top tips to keep HMRC happy when it comes to Christmas parties:

Make a list, check it twice

Keep track of all employee expenses for the event. It’s easy to lose sight in the course of planning a major annual event but the little costs can really add up. Employees’ expenses could tip the scales and put you over the limit, so ensure these are recorded and relayed back to you.

Stem the flow

When the wine is flowing and the whole office is united in a rendition of Fairytale in New York it can be hard to act as the voice of reason. But don’t be afraid to close the bar. Some employees may grumble but you can apologise – and of course you can always blame the tax man.

Bring people together

Sorry, you can’t have separate Christmas parties and still claim them under the £150 allowance. It’s a no-no under tax rules. Instead, take the opportunity to bring the company together by holding a single party and inviting all employees. Not only will you save on tax, hopefully you will see improved relations between teams that wouldn’t otherwise get to know each other.

Nurture these relationships and they may yield innovative new processes – and maybe even products – for the benefit of the whole business in the new year.

Keep an eye on the ‘gifts’

It’s not just the £150 allowance that you need to bear in mind. Don’t forget that there’s a £50 limit on employee gift allowances per year as well. So do feel free to give a high-performing individual a nice bottle of wine at Xmas – but only if you haven’t also given birthday gifts throughout the year.

Don’t be too generous

‘Tis the season of goodwill and you will no doubt be feeling the Christmas spirit once the party is over. But whatever you do, don’t send HMRC a thank-you gift. It may be a lovely gesture but HMRC is extremely strict about benefits to employees – and they apply it themselves. Unfortunately this means that they won’t be able to accept your gift, no matter how thoughtful it may be.

A simple solution

Of course, Christmas time has one thing in common with the rest of the year. The easiest way to keep the tax man happy and avoid an unwanted financial hangover is to show that you have a policy and can apply it consistently.

As an added bonus it might even reduce your employees’ frustration at expenses time enough for them to give your finance team a Christmas hug, if they’re feeling really generous – or have perhaps had too much wine at the Christmas party.