Updated on: Feb 17, 2024
This article is dedicated to all of the limited company contractors and freelancers who have left their Christmas tax planning to the last minute. It might be because they’re still trying to get those last billable hours charged before the Christmas break, or they’ve been so busy trying to meet clients deadlines but they’re not sure if the upcoming holiday period is for Christmas or Easter.
Either way after reading this article we hope you’ll take yourself and a partner out for a tax free £300 Christmas shout.
As the festive season rolls around, businesses across the UK are gearing up for their annual Christmas parties. But amid the merrymaking and cheer, one question often lingers in the minds of limited company contractors- “Can I claim a Christmas party as a business expense?” The answer, in many cases, is yes. But like anything related to tax, it comes with its share of nuances and guidelines.
Key Takeaways
- Understand the £150 per person exemption for Christmas parties to be eligible for claiming it as a business expense.
- Virtual events may also qualify, provided they are organized in a structured manner and proof of attendance is supplied.
- Gifts should adhere to ‘trivial benefits’ criteria with value not exceeding £50 per person. Cash gifts and vouchers exchangeable for goods remain taxable.
Understanding the £150 Per Person Exemption
Under the £150 per person exemption, Christmas parties can qualify as a tax deductible business expense. This exemption, contrary to common belief, is not an allowance but rather a criterion that company directors must meet to claim their Christmas party costs as a business expense.
Remember, the £150 per head limit, which includes VAT, applies to each party attendee. So, if the cost per person for your staff Christmas party exceeds the £150 exemption limit, the entire expense of the event will be considered a taxable benefit which will then create an additional PAYE cost for the employee and Class 1A national insurance contributions costs for the employer.
Criteria for the exemption
The exemption applies only when the annual party, in this case, the office Christmas party, is held annually and is open to all employees, with the cost per employee not exceeding the £150 limit. This means that the event must happen once a year, be open to all employees, and the overall cost per head, including associated costs such as VAT, accommodation, and transport, should not exceed £150.
Also, the £150 limit is applicable to each guest, including each family member, such as partners and spouses of attending staff members. Ensuring the per person cost doesn’t exceed the limit is critical to avoiding a Christmas party hangover, otherwise, you might face a significant tax bill.
Impact on combined cost of multiple events
If your company hosts an annual event or multiple events throughout the year, you need to be mindful of the combined cost. Ensure the combined total cost per person for all these events stays within the £150 tax exemption limit.
The £150 per person exemption is calculated by summing the cost per person of all the events held within the year, which must not exceed £150, including VAT, in order to qualify for the exemption. In the case of multiple annual parties, the exemption can be distributed to several events as long as none of them individually or collectively surpass the £150 per person limit.
Virtual Christmas Parties and Tax Deductions
With the advent of virtual events, the tax landscape has also evolved. Virtual Christmas parties, just like their in-person counterparts, can be claimed as business expenses under specific conditions.
The most suitable approach to validate attendance at a virtual Christmas party is to:
- Organize a well-structured online activity, such as a Christmas quiz
- Consider offering hampers or equivalent items to establish the party’s eligibility for the annual function exemption
- Provide proof of attendance to HMRC to show the event was open to all employees and meets the exemption criteria.
Evidence required for claiming expenses
Claiming expenses for a virtual event requires proof of purchase, just like any other business expense. This includes demonstrating attendance and proving that the entertainment was structured. For example, you can maintain records such as:
- Registration confirmation
- Email correspondence
- Screenshots of participation
- Certificates or badges received
Eligible types of structured entertainment for expense claims encompass ticketing systems, streaming services, and fees for performers such as magic shows. Maintaining decent documentation of these expenses and evaluating their eligibility for tax deductions is important like any good contractor should know 🙂
Claiming VAT on Party Expenses
Having covered the basic expenses, delving into the specifics of VAT on Christmas party expenses is also important. The primary rule is that you’re eligible to claim VAT spent on entertainment for employees such as staff parties, provided that the cost per person doesn’t exceed £150, inclusive of VAT.
If your entire Christmas function has directors and staff attending, the full cost of any input VAT can be claimed. If guests or partners of the staff are also attending, the VAT reclaim is then limited to the staff element only.
Christmas Gifts and Tax Deductions
Christmas isn’t complete without gifts, is it? And these gifts can also be tax-deductible, provided they meet specific criteria. Christmas gifts for employees may be considered for tax deduction if they fall under the category of ‘trivial benefits’ and do not exceed the value of £50.
As for client gifts, they need to align with certain tax-deductible criteria. You could use items like a business diary with your trading name or branded office supplies for qualifying purposes. The same applies to sporting gear. However, in order to claim deductions on client gifts for tax purposes, the gifts need to have a clear advertisement, not be food, alcohol, or tobacco products, and each gift must not exceed the value of £50 per person.
Client gift guidelines
Ensure any client gifts selected meet the criteria for tax deductions. The term ‘conspicuous advertisement’ on a client gift for tax purposes refers to a clear and visible advertisement for the trader or company. This advertisement should prominently feature the business name or logo.
However, not all items qualify as business gifts. According to HMRC guidelines, business gifts should not include:
- food
- alcohol
- tobacco products
- vouchers exchangeable for goods
And most importantly, if a business gift to a client surpasses £50, the entire amount will be disqualified by HMRC and considered non-deductible.
Employee gift rules
Coming to employee gifts, they can be claimed as business expenses if they qualify as ‘trivial benefits’. A ‘trivial benefit’ in the context of employee gifts for UK tax purposes is defined as small token gifts such as flowers, chocolates, or a meal out.
However, in the UK, the maximum threshold for employee gifts eligible to be claimed as business expenses is £50. Any gifts exceeding this amount must be reported and are subject to taxation. It’s important to remember that cash gifts or vouchers exchangeable for cash are consistently taxable, and gifts of food, drink, tobacco, and vouchers do not qualify for a tax deduction.
How to Claim Christmas Party Expenses
Having covered the details of Christmas party expenses and gift deductions, let’s explore how to claim these expenses. To claim Christmas party expenses, you need to record the cost in your accounting software and upload supporting documentation, such as receipts and evidence of attendance.
Important tip! When logging Christmas party expenses in your accounting software, categorize the cost as a “Staff Costs – Annal Events” (or something similar) and upload any receipts or invoices. This ensures that your expenses are accurately tracked and helps you stay organized during tax season.
Supporting documentation
Supporting documentation for your claims can include:
- Receipts for purchases
- Invoices from vendors
- An attendance list demonstrating the participants in the event
- An agenda or program outlining the event’s activities
- Any contracts or agreements associated with the event organization
Having a system in place is beneficial for storing and organizing your documentation. Here are some tips:
- Designate a specific drop zone or file folder for your tax documents.
- Take photos of your receipts to create a digital backup.
- Consider storing your documents digitally to save physical space.
Summary
The festive season doesn’t have to be a time of financial stress for businesses. With careful planning and adherence to guidelines, your Christmas party expenses can indeed be claimed as business expenses. Remember, the key lies in understanding the £150 per person exemption, adapting to virtual parties, claiming VAT on party expenses, and keeping track of Christmas gifts. So, go ahead and plan your Christmas party with confidence, knowing you’ve got the tax side of things covered!
Frequently Asked Questions
Are Christmas party expenses deductible for a company?
Yes, Christmas party expenses for businesses can be deducted from their profits before tax, regardless of the size or extravagance of the event. Though it can be a double-edged sword. As explained above if the all-in cost does not exceed £150 per head then there is no taxable benefit on the employee. If it does exceed this budget, then the cost is treated as a taxable benefit for the employee (where they will pay PAYE) and the company will pay class 1A National Insurance contributions. Under either scenario though the cost is still deductible for the business against corporation tax.
Are Christmas decorations a business expense?
Yes, we thought this was s strange question too, but Christmas decorations are an allowable business expense and can be claimed as part of the day-to-day running of your business. I mean, who doesn’t like putting up some decorations around the office. However, it is best to exercise caution and not go overboard.
How do you account for a Christmas party?
To account for a Christmas party, add up the cost of room hire, food, entertainment, prizes, transport and accommodation to get the total cost. Then simply add as an expense in your accounting software.
Can I have a Christmas party as a sole trader?
Unfortunately, it is not possible to claim a tax allowance for Christmas parties as a sole trader or partnership. Therefore, you cannot have a Christmas party as a sole trader.
What is the £150 per person exemption?
The £150 per person exemption allows a business claim Christmas party expenses of up to £150, including VAT, for an event open to all staff, where the directors / employees will not face any benefit in kind charges. The exemption was part of the government’s efforts to encourage good employer-employee relations by allowing companies to host events that could improve staff morale and team cohesion without the parties becoming a taxable benefit. We’re not sure when this was first introduced, but I am pretty sure it was around in the early 2000’s, in which case it should be a due an inflation adjusting boost to £300 per head.