An annual function or party for employees is tax exempt, provided the cost isn’t over £150 per head. The amount paid by the employer is tax deductible, and employees aren’t taxed on the benefit they’ve received in going to the party.
To calculate the cost per head, the cost of the entire function is added up (room hire, food, entertainment, transport etc) and divided by the total number of people attending. Other guests can attend, but the main function of the event must be to entertain staff.
To be exempt, the event must be for all staff, or all staff in a particular location. If the only employees of a company are the directors and members of their family, then an event which they are all invited to can qualify. The event must also be annual, so a one-off celebration such as an anniversary wouldn’t qualify. A regular Christmas party or summer barbecue would. HMRC’s guidance can be seen here.
If you run a family company, and you take the family out each year to celebrate Christmas, or to a summer barbecue, don’t forget to raise a glass to HMRC while you’re there! Cheers!