Are Christmas Parties Tax deductible?
If you are holding a party this Christmas season, there is a way for you to use the cost of entertaining your employees as a deductible expense for corporation tax purposes.
Here’s everything you need to know about how you can be tax efficient during the holiday season:
- Deductible Expenses
- Exemption not allowance
- Separate locations and departments
- Multiple annual events
- Salary sacrifice arrangements
- Entertaining Clients
Many companies celebrate the festive season by throwing a party for their employees. As an employer, holding a social function for your employees may hold certain National Insurance and reporting obligations.
- What you report to HM Revenue and Customs (HMRC) and what you need to pay depends on:
- How often parties throughout the tax year were held
- Who was invited
- The cost per invited employee
- Whether employees involved were directors, and how much they earn
There are times when you don’t have have to report to HMRC or pay tax and National Insurance. You can be exempt on expenses from social functions and parties, like a Christmas party and use it as deductible expenses for corporation tax purposes in your limited company.
To be exempt, the party must meet the following criteria:
- £150 spend or less per head
- There can be more than one party in the year, like a summer and a winter party, but combined they must come to £150 otherwise only one party can be exempt, not both
- Be open to all your employees
Exemption not allowance
This £150 you can spend for each of your employees is not an allowance but an exemption. The cost of the function includes VAT and the cost of transport and/or overnight accommodation if these are provided to enable employees to attend. 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.
Take note about the £150 exemption, if you get a bit carried away and overspend by even just £10 you can no longer claim the tax exemption. The overall cost of all events must not exceed £150.00 per head. If it does, the entire cost will be treated as a benefit-in-kind (BIK) and be subject to additional tax and NI.
Separate locations and departments
If your business has more than one location, an annual event that’s open to all of your staff based at one location still counts as exempt. You can also put on separate parties for different departments, as long as all of your employees can attend one of them.
Multiple annual events costing less than £150 per head combined
As long as the combined cost of the events are no more than £150 per head, they’re still exempt.
Salary sacrifice arrangements
You do have to report how much social functions and parties are worth to each employee if they are a part of a salary sacrifice arrangement.
You may want to try and apply this exception for client entertainment. However, if you are entertaining your clients this Christmas you cannot use this tax exemption for corporation or VAT purposes.
For example, you may want to have a ‘directories only’ party. However, you cannot claim this as a deductible expense for corporation tax because it doesn’t meet the criteria that all employees should be invited to join the party.
To sum it up, your limited company can claim social functions and parties as deductible expenses for corporation tax purposes. However, there is a limit per head and the party must meet certain criteria to be eligible for tax deductions and exemptions.
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