The most tax efficient way to celebrate Christmas in your company

As the festive season approaches and the dark nights roll in, the annual company Christmas party is on everybody’s mind. It provides a perfect opportunity to reward employees for all of their hard work and is usually a highlight in many work calendars.

Luckily, HMRC acknowledges Christmas celebrations as an important motivator in the workplace, which is why there are incentives in place for limited companies who want to thank their employees for a year of hard work by spreading some Christmas cheer.

It’s essential for employers to understand and stick to the criteria stipulated by HMRC but doing so can ensure better tax efficiency over the Christmas period. When applied appropriately, there could also be a nice company kitty for those all-important Christmas festivities.

Understanding the small print

If the below conditions are met, expenditure on annual events like Christmas parties will qualify for corporation tax relief and VAT reclaim. However, this will not be regarded as a taxable benefit meaning there is no P11D liability or personal tax to pay.

• The cost of events can include food, drink, tickets for entry, accommodation and a taxi fare home
• The cost must not exceed £150 per attendee (including VAT). If there are multiple annual events, where the aggregate cost is £150 per attendee or less, the total will still qualify. It is important to note that this is not an allowance, it is a limit. If the cost of providing the event exceeds £150 per head, the full amount will be a taxable benefit.
• The event must be open to all employees. It can be restricted to all employees in a specific location; however, it cannot be restricted to a certain job role, such as just management.

It is also essential to note that this is an annual allowance, but you can use it how you feel fit.  Whether you choose to throw a summer event, a festive party, or both, the combined cost (per person) of all parties in a single year cannot exceed £150. You can also claim an additional £150 per person for a plus one for each employee, providing they are a family member or partner.

Exceptions to the rule

It is important to note that directors/partners/owners do not benefit from input tax recovery under ‘staff entertaining’. HMRC takes the view that these individuals do not need to be rewarded or motivated with entertainment. However, HMRC do concede that when these individuals attend a staff party, input tax can be recovered in full.

When exploring these entertainment expenses, it is essential to make sure you are aware of what falls under staff expenses (e.g. a Christmas party) and what falls under client expenses (e.g. taking a client for a Christmas lunch).

Entertainment will be applicable for corporation tax relief, as long as it is exclusively for the purposes of trade and is not incidental to client entertainment. If in doubt, HMRC suggests asking yourself if, in the absence of clients/customers, the expenditure would still be incurred. If so, this would be regarded as staff entertainment.

Ultimately, client entertainment is not tax deductible, and it is not possible to reclaim VAT on this expenditure. It is still allowed to be an expense for the business, and not a personal income, but it is essential to ultimately be sensible.

Christmas gifts

It is always nice to receive / give a Christmas present to the team or to clients, as a ‘thank you’ but it is important to be aware of how this is impacted by tax rules, as it isn’t as simple as many may think.

In most scenarios, gifts for clients are treated in the same way as client entertainment, so the company wouldn’t receive tax relief or be able to reclaim the VAT on the expense. However, there are exceptions if the gift is:

• Branded or viewed as an advertisement for the business, such as a branded umbrella or stationery
• The gifts per client amount to £50 or less for the tax year
• The gifts are not food, drink, tobacco or vouchers

For gifts to employees, these are likely to be considered in the same manner as staff entertainment unless the gift is classed as a ‘trivial benefit’ or has a cash value:

• Trivial benefits are gifts that cannot exceed £50, be part of an employment contract or be a reward. If these don’t apply, the company would get tax relief on these and there would be no personal tax to pay. Just be careful to not exceed £50, as then the whole amount would be taxable as a benefit to the employee like the below gifts;
• For any benefits that have a cash value, they would be classed as a benefit which would mean both the employee would have to pay personal tax on the cash value and the employer would have to pay NIC via a P11d.

There are a lot of ways you can utilise the HMRC rules to make sure you, your customers and your staff have a great festive period. SJD Accountancy is here for any questions you may have surrounding tax and your business. Find out more at: www.sjdaccountancy.com