Christmas is often a time for entertaining both staff and clients, so whether it is hosting an office party or buying gifts for your top clients, it is important to understand what the tax man will say to all of this, so you know what you can and cannot claim as a business expense through your company.
Christmas staff parties
Tax legislation does not include a specific allowance for an employer to provide a ‘Christmas’ party for employees, however HMRC do allow limited tax relief against the cost of holding a social function for employees, with an annual event allowance of £150 per head, providing the following conditions are met:
- The event must be primarily for entertaining staff and must be open to all employees (or those at a specific location if you have numerous offices).
- An annual Christmas party generally is not taxable on those attending, provided that the average cost per head of the functions does not exceed £150 per annum (including VAT).
- Cost per head includes the costs of transport to and from the event, accommodation provided, and VAT. Total cost is then divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring.
- VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event, the input tax should be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and output tax should be accounted for on the amount of the contribution.
Remember, you can use this allowance at any time, not just Christmas. Therefore provided the £150 limit is not exceeded, any number of parties or events may be held during the tax year.
Entertaining staff is not treated for tax in the same way as customer entertaining and it’s not possible to claim tax relief on the entertainment of clients or associates. The full cost of staff parties and/or events will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.
VAT-registered businesses can claim back input VAT on the costs, but this may be restricted where this includes entertaining customers.
The general rule is that all gifts to staff are classed as taxable benefits, however there are exemption for certain gifts. Small gifts can be given to employees and directors on a tax exempt basis as long as:
- the cost of the gift is not more than £50 (including VAT) per employee,
- the benefit is an actual gift, not cash or a voucher,
- the gift does not form part of a benefit which is part of a contractual obligation, or is in recognition of particular services performed by the employee as part of their job.
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.
Gifts to clients are generally considered “entertaining” and you usually cannot claim tax relief or reclaim VAT unless the gifts comply with all of the following:
- the gift contains your businesses logo/advertising. e.g. branded pens, diaries, notebooks, keyrings etc.,
- all gifts given to any one client within the tax year amount to £50 or less, and
- the gift is not a voucher, food, drink or tobacco.