Not so long ago, I remember watching a French spy comedy on Netflix called A Very Secret Service (Au service de la France), and chuckling over the way the spooks use their seemingly unlimited expense accounts to do the dirty work of diplomacy. This led me on to thinking about Christmas parties and tax.
Sadly, in the world of the small businesses and the self employed, not only are expense accounts much more limited, there are restrictions on what you can claim back from the taxman. Even at Christmas.
That’s not to say the taxman is taking a moral stance about your choice of entertainment – if, like the spies in the series, you want to treat yourself and others to champagne and go-go dancers, HMRC won’t object. It simply may not let you claim them back against tax.
So what are the rules regarding entertainment expenses for parties – and given that it’s coming up to that time of year – Christmas parties? And what can you claim back?
This short guide should help put you straight.
What does the taxman define as ‘entertaining’?
In a nutshell, HMRC defines entertaining as providing free or subsidised hospitality. It can include food and drink, hotels, flights, visits to sporting events, theatre tickets and similar. The taxman is less interested in what kind of entertainment you offer, but very interested in who you offer it to – whether employees or others.
Christmas parties and events
Christmas parties are a great way to boost morale, and if you have a limited company they can be tax and National Insurance exempt. You can hold any number of staff functions over a year as long as they fulfil these criteria:
- The total cost across all functions is £150 per head or less
- The event is annual, such as a Christmas party or summer barbecue
- The event is open to all employees.
But I must give few words of warning. The cost of the event is not just the food bill from the restaurant – it includes the cost of the drinks, the cost of the transport to the venue and the cost of cabs home. Those costs and their ilk will all be part of the cost of the function.
So if the cost per head of the Christmas party is £150, all is well. Income tax or corporation tax deduction is available for the employer and the VAT on the cost can also be claimed back. The employer doesn’t have to put the item on the staff p11d’s so no there’s no tax bill for the employees and no class 1a NIC for the employer. Joy all round at Christmas. Ho Ho Ho!!!
But if the cost of the “do” is £151 per head, no one will have a happy new year. None of the cost is allowed for tax – none at all. The VAT can’t be claimed as input tax, the expense goes on the p11d of staff attending and tax and NIC is due on the £151
Also, you can’t be sneaky and slide clients into your staff “do” and hope to by-pass the rules on entertaining. There will be no tax relief and no claiming of VAT input tax on the proportion of the costs relation to client entertaining. So if 25 of 100 guests are clients, you’ll have to disallow a quarter of the costs as entertaining.
There is another task that the employer should carry out before the wine flows – a task for tax purposes that is. They should note the names of staff attending the “do”, so that if the cost exceeds £150 per head the employer knows which staff members should have the benefit in their p11d’s.
Just when you thought things were getting simpler, there’s something else to bear in mind. Say you planned to entertain 100 staff members, and only 25 turned up – how would you calculate the cost per head? There are no hard and fast rules here, only what the taxman thinks is fair and reasonable. So say there was a blizzard on the day of the party, and 75 of the 100 couldn’t make it, you could make a strong case for there being no benefit in kind – the intention was to entertain 100 people. But as always, it’s always safest to be conservative when dealing with HMRC.
I am beginning to envisage the ideal member of staff for the staff Christmas party. They are happy to eat the Christmas special and avoid the more expensive à la carte menu. They drink little, if anything, so they’re sober enough to make their own way home. They enjoy themselves, entertain everyone (without telling bawdy jokes), and are forgiving if the accounts department get their sums wrong and they get landed with a taxable benefit.
So, whether you opt for the go-go dancers or a more austere Christmas party, keep costs per head under £150 – or it won’t just be a sore head everyone will be waking up with!
About Ben Locker
Ben Locker is a copywriter who specialises in business-to-business marketing, writing about everything from software and accountancy to construction and power tools. He co-founded the Professional Copywriters’ Network, the UK’s association for commercial writers, and is named in Direct Marketing Association research as ‘one of the copywriters who copywriters rate’.