Staff Entertaining and the Christmas Party — What a Trade Business Can Claim (2026)

The £150 Per Head Annual Function Exemption

HMRC allows an employer to spend up to £150 per head, per year, on annual social events for staff without it becoming a taxable benefit-in-kind (BiK). A Christmas party, a summer barbecue, an annual awards night — these all qualify, provided the conditions are met. The £150 is the total figure inclusive of VAT, and it covers everything connected with the event, not just the food.

The single most important thing to understand is that this is an exemption, not an allowance. An allowance would mean the first £150 is tax-free and only the excess is taxed. That is not how this works. If your cost per head comes to £151, you do not get £150 tax-free and £1 taxed — the entire £151 becomes a taxable benefit-in-kind. Go even £1 over the limit and the whole amount falls into charge. This is why careful budgeting matters far more here than with most expenses.

To qualify for the exemption, three conditions must all be met:

• The event must be an annual event — a recurring function such as a Christmas party or yearly summer event, not a one-off celebration like a contract win or a staff member's leaving do.
• It must be open to all employees (or all employees at a particular location if you operate from more than one site). You cannot restrict it to directors or a chosen few and still claim the exemption.
• The total cost across all qualifying events in the year must come to £150 or less per head.

Quick Reference: The £150 Staff Party Exemption

What Counts in the Per-Head Cost

When working out whether you're inside the £150, you must include the full cost of putting the event on — not just the meal. HMRC expects you to add up:

• Food and drink — the meal, the bar, the welcome drinks, all of it
• Venue hire — the room, the marquee, any function-room charge
• Transport — taxis or a minibus laid on to get people there and home
• Overnight accommodation — if you put staff up in a hotel as part of the event
• VAT — the figure is gross, so VAT counts toward the £150
• Partners and guests — if employees bring a partner and you pay for them, those heads count too

The cost per head is calculated simply: total cost of the event divided by the total number of people who attend, including any non-employee guests such as partners. So a £2,000 party attended by 10 staff plus 6 partners (16 heads) works out at £125 per head, not £200. Counting the guest heads in the divisor works in your favour — but remember that any portion attributable to a partner is itself a benefit on the employee if you tip over the limit.

Staff Entertaining vs Client Entertaining

This is the distinction that catches most trade businesses out, so it's worth being precise. Staff entertaining — entertaining your own employees — is an allowable expense for the business (it reduces your corporation tax) and, within the £150 exemption, it is not a taxable benefit on the staff either. Everyone wins.

Client or customer entertaining is treated completely differently. Taking a builder's merchant rep, an architect, a developer or a customer out for lunch, drinks or a hospitality event is not tax-deductible for the business — you cannot offset it against your profits for corporation tax. And the VAT on client entertaining is generally not reclaimable either. It comes out of post-tax money. You can still do it, and many trade businesses do, but go in knowing it gives you no tax relief.

A common mixed scenario: you take a couple of staff and a couple of customers to a sporting event. The cost has to be split. The portion relating to your employees may be allowable (and may fall under the £150 if it meets the annual-event conditions), but the portion relating to the customers is disallowable client entertaining. Keep the split clear in your records.

Holding Two Events — How the £150 Splits

The £150 is an annual figure that can be spread across more than one event. If you run a Christmas party and a summer BBQ, you don't get £150 for each — you get £150 across both combined, and only events that individually meet the conditions count.

Where it gets useful is that you can allocate the exemption to whichever combination of events keeps you within £150 per head. Say your Christmas party costs £100 per head and your summer BBQ costs £70 per head — a total of £170. You cannot cover both. But you can apply the exemption to the £100 Christmas party (fully covered), and then the £70 summer BBQ becomes the taxable event, rather than trying to part-cover both. You pick the most valuable event to shelter. The £70 BBQ is then the benefit-in-kind, not the full £170.

What Happens If You Exceed £150

If a qualifying event tips over £150 per head, the full cost (not just the excess) becomes a taxable benefit-in-kind on each employee who attended. You have two realistic options:

• Report it as a benefit-in-kind — the value goes through the payroll/benefits reporting and each employee pays income tax on their share, with the business paying Class 1A National Insurance on the value. This means your staff are personally out of pocket for tax on a party you paid for, which rarely goes down well.
• Settle the tax for them via a PAYE Settlement Agreement (PSA) — a PSA lets the employer pay the tax and National Insurance on the benefit on the staff's behalf, so they aren't left covering the cost of a gift you intended. This is the usual route trade employers take when a party runs over. Note the tax is grossed up under a PSA, so it costs the business more than the headline figure, but it keeps the gesture intact.

VAT Recovery on Staff Entertaining

If you're VAT registered, input VAT on staff entertaining is generally reclaimable as a business expense — the Christmas party for your employees is treated as VAT-recoverable in the normal way. That is a meaningful difference from client entertaining, where the VAT is blocked.

There are restrictions, though. Where the cost relates to guests or partners who are not employees, HMRC restricts the VAT recovery on that proportion — the relief is meant for your staff, not their plus-ones. And HMRC will challenge VAT recovery where an "event" is really only for directors or partners on their own, because the rules require provision to staff generally rather than to the owners alone. In a typical owner-managed trade company with a genuine all-staff party, recover the VAT on the employee element and apportion out the guest element.

The Sole Trader Position

If you're a sole trader rather than a limited company, the staff entertaining rules work differently for you personally. A sole trader does not have an employer-employee relationship with themselves, so your own meal or party isn't "staff entertaining" — you cannot put on a Christmas dinner for yourself and claim it under the £150 exemption, because you're not your own employee. The cost of feeding yourself is treated as personal, not a business expense.

However, if you employ staff as a sole trader, the £150 exemption applies to events for those employees in exactly the same way as it would for a company. The distinction is only about the proprietor: the owner's own attendance and meal are not employee entertaining, but a party laid on for the team they employ is.

Trivial Benefits — A Separate Route for Small Gifts

Don't confuse the party exemption with trivial benefits, which are a separate relief for small gifts. A trivial benefit can be given tax-free where it costs £50 or less, is not cash or a cash voucher, is not a reward for work or performance, and is not part of the employee's contract. A bottle of wine, a Christmas hamper or a £50 store gift voucher to each member of staff can fall under this, completely separately from the £150 party limit.

This means you can run a £150-per-head Christmas party and hand each employee a £50 trivial-benefit gift, and both can be tax-free, because they sit under different rules. For directors of close companies there is an annual cap of £300 on trivial benefits, but for ordinary staff there is no overall annual limit on the number of trivial benefits — each just has to meet the £50 test on its own.

Worked Examples

Example 1 — fully covered. A limited company holds a Christmas party for its 10 staff. The total bill — venue, food, drinks, taxis home and VAT — comes to £1,400. That's £1,400 ÷ 10 = £140 per head. It's an annual event, open to all staff, and the cost is under £150 per head. The whole £1,400 is an allowable expense for the business, the VAT is recoverable (subject to apportioning out any guest element), and there is no benefit-in-kind on the staff. Nobody pays a penny of personal tax on it.

Example 2 — over the limit. The following year the same company pushes the boat out and the party costs £1,600 for the same 10 staff — that's £160 per head. Because this is an exemption, not an allowance, the company does not get £150 covered and only £10 taxed. The entire £160 per head becomes a taxable benefit-in-kind on each employee. Across 10 staff that's £1,600 of benefit reportable, with the business owing Class 1A National Insurance on it and each employee facing income tax on their £160 share — unless the company sets up a PAYE Settlement Agreement to pay the tax and NIC on their behalf so the staff aren't left out of pocket. The lesson: a £20-per-head overspend converted a tax-free party into a fully taxable one.

Record-Keeping

Whatever you spend, keep the evidence. HMRC can ask you to demonstrate that an event met the conditions, so retain:

• Itemised invoices and receipts for the venue, catering, drinks, transport and accommodation
• An attendance list — who came, including partners and guests, so you can prove the per-head figure
• A note that the event was open to all staff (or all staff at a location)
• Your VAT apportionment working, separating the employee element from any guest element
• For client entertaining, a clear split so the disallowable portion is identifiable

Good records turn a potentially awkward HMRC enquiry into a non-event, and they make it far easier for your accountant to confirm the party stayed inside the exemption.

The Bottom Line

For a trade business with staff, the annual function exemption is a genuinely valuable bit of relief — a tax-free way to thank the team that also reduces your corporation tax. The rules reward discipline: stay at or below £150 per head across all your annual events, keep it open to everyone, count every cost including VAT and guests, and you're fine. Treat it as an allowance, drift over the line by a few pounds, and the whole thing becomes taxable. Keep client entertaining mentally in a different box entirely — no corporation tax relief, no VAT recovery — and you won't get caught out.