A recent report by the Forum of Private Businesses revealed that one in five cash strapped businesses will axe their staff Christmas parties this year. With our ongoing economic woes on their minds, prudent bosses are nervous about splashing out on festive entertainment. But Randall & Payne LLP tax expert Lucie Hammond advises businesses not to shelve those party plans just yet – there is a tax break available to reduce or even write off the cost of a staff Christmas party.

The taxman wants us to drink and be merry? Who knew!

I wouldn’t go that far but yes, if you are profitable and stick to certain rules you can claim the cost of a staff Christmas party against your tax bill.

Every business has a maximum annual tax allowance for staff entertainment of £150 per person. Regardless of the recession, your company is still entitled to this allowance.

It sounds too good to be true – there must be a catch?

There are a number of things to bear in mind;  
- The event must be open to all staff (or all staff at a particular location).Employers should also note that the exemption is not available for a one-off event, but applies to an annual party whether held at Christmas or another time of the year.
- A Christmas party does not count as a taxable benefit in kind for the staff who attend provided the £150 per head limit is not breached. If you exceed the £150 limit, even by a penny, the whole party becomes a taxable benefit on the employee.
- In calculating the cost per head, all costs must be taken into account, including the costs of transport to and from the event or accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost.

- The limit applies to the number of people actually attending, not those expected, so if several people fail to turn up and you made a block booking in advance, you may lose out.
- Where more than one function takes place in a year, the cost of both added together must not exceed the £150 limit.
- If you want to invite employees’ partners this remains tax free provided the total cost does not exceed £150 per head. One guest per employee is permitted under these rules with a potential tax-exempt benefit of up to £300 per employee.

Can I use this allowance to entertain customers?

Unfortunately, there is no way you can claim the cost of entertaining customers or potential customers against tax or even claim back the VAT. Entertaining leads to tax penalties – that’s the basic thrust of the tax system in the UK.  All costs of entertaining anyone except staff are disallowed for tax, and must be added back to profit.

Lucie Hammond is a tax expert and partner of Gloucestershire accountants Randall & Payne LLP. To speak to Lucie call 01453 763471 or email ljh@randall-payne.co.uk.