£150 per head Christmas party expense exemption for limited companies

If you’re thinking of holding a Christmas party for your company this year – or a party at any time of the year – you may be able to enjoy Corporation Tax relief on your expenditure, as long as it meets HMRC’s rules.

Although limited companies cannot usually claim tax relief on business entertainment expenses, HMRC provides an exemption for qualifying annual staff parties and social functions, subject to a cost limit of £150 per head per year.

Importantly, this is an employment tax exemption for annual functions an employer provides for employees. A sole trader cannot use it to fund their own party, although a sole trader with employees may be able to use it for a qualifying staff event.

Key points to remember

1. Cost limit:
   The £150 per head limit is strict. Even exceeding it by a penny means the entire cost of that function can become taxable as a benefit in kind for employees. It is not an allowance. Your company must incur real costs in order to use the exemption.
2. Who can use the exemption?
   The exemption applies to employers providing qualifying annual functions for employees. A sole trader cannot use it for themselves, but may be able to use it for employees.
3. Qualifying events:
   • The event must be open to all employees, or all employees at a particular location where appropriate.
   • If the company’s only employees are directors, a directors-only event can still qualify.
   • Multiple annual events can qualify as long as the total cost of the events you choose to exempt does not exceed £150 per head.
   • The exemption applies to parties or gatherings at any time of the year, not just at Christmas.
   • The function should be annual. A one-off celebration does not automatically qualify simply because it is a staff social event.
   • A director can bring a guest, and the guest is included when calculating the cost per head.
   • Virtual annual parties can also qualify.
4. What costs are covered?
   Allowable costs can include entertainment, accommodation and transport directly related to the event.
5. What about VAT:
   • The £150 limit includes VAT, if it has been added.
   • Your company can usually reclaim any VAT charged on employee entertainment, although this may be restricted if the event is only open to directors or partners rather than employees in general.
   • If non-employee guests attend, some VAT may need to be apportioned. You can read more in VAT Notice 700/65.
6. Multiple office locations?
   • If your company has more than one office location, an event open to all staff based at one location can still qualify.
   • If you run a larger company, you can have separate events for different departments, as long as all employees can attend one of them.

How does the £150 per head exemption work in practice?

• You can claim the exemption for one or more qualifying annual functions, provided the combined cost of the events you choose to exempt does not exceed £150 per head.
• For example, if you hold two parties costing £80 and £90 per head, the total is £170. This does not mean both events lose the exemption. You can choose one event to remain exempt, while the other is taxable.
• To calculate the per-person cost, divide the total cost of the event, including VAT, by the number of attendees, including employees and their guests. For example:
  Total event cost: £3,000
  Attendees: 20 employees + 10 guests = 30 people
  Per-person cost: £3,000 ÷ 30 = £100

The £150 exemption deals with the employee benefit-in-kind treatment. The Corporation Tax treatment of staff entertaining is a separate issue.

Further information

• The VAT treatment of entertainment expenses – VAT Notice 700/65
• A fuller explanation of the £150 exemption for annual parties and social functions – EIM21690
• HMRC examples showing how the exemption applies where there is more than one annual event – EIM21691
• Find out what other expenses you can offset against Corporation Tax in our guide to limited company expenses