As a limited company owner, you may feel that the tax system does you few favours.
However, the favourable tax treatment of your annual Christmas party is one benefit available to businesses every year.
There is no specific allowance for a ‘Christmas party’ but HMRC does provide limited tax relief for the cost of holding an ‘annual event’ for your company, providing certain conditions are met.
Outside of this exception, staff entertainment is considered to be a ‘Benefit in Kind’, and directors and employees would need to pay tax on the amount of the benefit.
What can I claim?
As a company director, you are entitled to provide an annual event for your staff, yourself and your partner and reclaim the costs against the company – provided the cost does not exceed £150 per head (including VAT) per year.
The cost per head can include food and drink, transport and accommodation but must not exceed the £150 limit. The event must also be open to all company staff to attend.
You could choose to hold several events throughout the year, or make a claim for a summer event rather than a festive one but the total claim must not exceed the £150 threshold.
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.
HMRC states that to calculate the cost per head, 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.
Customer and staff Christmas Gifts fall into the category of entertaining and as a general rule expenses, incurred by a business in providing entertainment or employee gifts, in connection with a business are not tax deductible.
However, tax law does provide a number of exceptions to this where the cost of a gift can be deductible.
Tax Relief on Christmas Gifts
If the gift incorporates advertising for the business, then that may be Tax deductible. For example, a branded golf umbrella or diary would be ok. However, if the Christmas Gifts consist of food, drink, tobacco, or any voucher that can be exchanged for goods, then that is not tax deductible, even if the festive chocolates are packaged with the company logo. There is a further restriction in that the cost of the gift cannot exceed £50.
There is a further relaxation of the rules where a company makes a gift of one of their products, and the item is given away during the ordinary course of that business, to advertise to the public generally. For example, if the business is a chocolatier, then it could make Christmas Gifts of chocolates to the general public for promotional purposes and obtain a tax deduction for the cost of the chocolates.
Christmas Gifts to Employees – Benefit in Kind
Christmas gifts to employees would also be tax deductible but it is important to ensure that gifts are not excessive over the course of a tax year as otherwise it may be treated as a benefit in kind and employee may have to pay tax on it.
The general rule is that all gifts to staff are classed as taxable benefits, however there is an exemption for certain gifts where the cost of the gift is not more than £50 per employee. To qualify for the exemption, the gift must not be in return for a salary sacrifice or in respect of work carried out and, although store vouchers are acceptable, the gift must not be cash or a voucher that can be exchanged for cash. For close companies, which includes the typical family-owned company, there is a cap of £300 per tax year for gifts to a director and their family.
VAT on Christmas Gifts
When it comes to VAT, you can claim the input VAT on gifts acquired for business purposes, which includes gifts for staff and customers but not things you buy for yourself or your family and friends! However, if the cost of gifts given to a person in a 12 month period total more than £50 (excluding VAT) and you have claimed the input VAT, you will have to charge output VAT on the total cost of the gifts. This rule applies to all types of gifts and if you think it is likely to apply, it might be easier not to claim the input VAT in the first place.
If you would like to discuss any of the matters related to this factsheet please contact us:
Tel: 0203 915 8585 or Email: firstname.lastname@example.org