As a limited company owner, you may feel that the tax system does you few favours. However, all is not lost, as there is still one benefit available to contractors each year – albeit a small one.
This is the favourable tax treatment of your annual Christmas do.
There is no specific allowance for a ‘Christmas party’ as such, however, HMRC does provide limited tax relief against the cost of holding an ‘annual event’ for your company, providing certain conditions are met.
This exemption has been extended to cover virtual events, as a result of the pandemic (see below for details):
Outside of this specific exception, staff entertainment is considered to be a Benefit in Kind, whereby employees are taxed on the value of benefits they personally receive each year. Employers also have to pay extra national insurance on the value of any perks they provide to their staff.
How does the £150 per person exemption work?
As a company director, you are entitled to provide an annual event for yourself, any staff you employ, and your partner, and reclaim the costs against the company, as long as the cost per head does not exceed £150 (including VAT).
The cost per head can include accommodation, transport, and food and drink – but must not exceed the £150 threshold, even by a penny. The event must also be open to all company staff to attend.
You may decide to hold several events throughout the year, but the total claim for all events must not exceed this threshold. So, you may decide to make the claim for a summer event rather than a festive one. It’s up to you.
Importantly, as with all expense claims, you do actually have to hold an event in order to reclaim the costs against your company. You can’t simply make a cash claim for £150.
To calculate the cost per head, HMRC states that you should ‘divide the total cost of each function by the total number of people (including non-employees) who attend in order to arrive at the cost per head.
What about reclaiming VAT on the party expenses?
According to HMRC VAT Notice 700/65, you cannot reclaim the VAT element on your party expenses if only directors and/or their partners attend the event. “This is because the goods or services are not used for a business purpose.”
However, you can reclaim the input VAT if directors and partners attend a staff party alongside other employees. HMRC says: “We accept that the tax is input tax and is not blocked from recovery.”
Virtual events are also allowed
In 2020, as a result of the COVID pandemic, HMRC confirmed that virtual events would also qualify for the exemption, providing that “all other conditions are also satisfied as the exemption applies to allow for costs of provision which are generally incurred for the purposes of the event itself.”
An example has also been added to EIM21691 to illustrate how a typical virtual event might be reimbursed.
As with many other tax rates and bands, this exemption hasn’t increased with inflation. In fact, had it done so since its introduction in April 2003, limited company owners would be able to claim around £215 per person for the annual Christmas party!
For a detailed explanation of the annual event expense rules, click here (HMRC).
The rules governing business expenses are complex, so do contact your accountant if you have any questions about what you can and cannot claim against your company’s Corporation Tax bill.
For an overview of all the typical business expenses you are likely to encounter as a limited company owner, click here.