Is your Christmas party tax deductible?
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Make sure you understand the rules - if you provide other annual entertainment for staff in addition to the Christmas party it could take you over HMRC's exemption limit and cost you more tax. On the other hand, if you stay within the spending limits you can save tax.
Basic rules for a tax efficient Christmas Party
- You can provide multiple tax free annual entertainment events for employees each tax year as long as the £150 cost per head (including VAT) for all of them is not exceeded.
- The events must be annual and open to all employees.
- Other guests may be invited, such as employees’ partners.
- The primary purpose of each event must be to entertain employees.
- Try not to include customers, as if there are too many of these the party might be deemed not staff entertainment in that case and therefore not allowable for tax purposes.
- You can claim back VAT on the cost of any staff entertainment. If it were customer entertainment, of course you couldn’t.
- If you’ve entertained customers as well as staff you will have to work out the VAT relating to the customers and ensure you don’t claim that back.
- Where overseas customers are concerned you may be able to reclaim input VAT, but that gets more complex.
Things to look out for
For example if you’ve got two annual staff entertainment events in a tax year, with event A costing £100 per head and event B costing £60 per head, the total cost per head of both comes to £160. You can treat the £100 per head event as exempt, but because the other event takes you over the £150 limit, event B is wholly taxable on the employees attending. What you can't do is say £160 -£150 = £10 taxable. This is a mean idea, but those are the rules.
Make a list of all attendees’ names and dates of function before the hangover kicks in. The cost of these functions may not just be the event itself. If you’re paying for travel and accommodation for the event those costs are all part of the £150 per head.
How to handle being over the limit
- No employee is going to thank you for having to pay tax on an event you’ve told them is for their enjoyment.
- Where the per head cost is exceeded in a year it’s best for your business to pay the tax on behalf of the employees for the event/s concerned using a PAYE settlement agreement. That gets calculated once a year. Your business also has to pay Class 1a NI.
- You'll need to apply to HMRC to use this option.
- It’s all a lot of fiddle faddle, as is the case with trying to comply with most HMRC regulations.
- When doing your bookkeeping, have a separate account called “staff entertainment” for these items, so they don’t get in the “customer entertainment” account.
- Your staff entertainment cost is allowable against corporation tax, whereas customer entertainment is not.
- If you don’t keep records or you get it wrong, you could incur a tax penalty, should it be shown later that some of your staff events were not exempt from tax.
Make sure you stay inside the £150 per head limit for the tax year, and save some tax for your business as well.
Have a very merry Christmas!
If it’s all too much to bear – we can sort this out for you! Call Frances on 01737 559211