Understand which expenses you can claim and strike the right balance between Scrooge and splurge.
It’s that time of year again. The tinsel is up, the countdown has officially begun, and office parties are in full swing. You want to treat your employees and clients to a party, or gifts, but you’re a bit worried about costs spiralling.
Don’t panic! Whilst there’s no specific ‘Christmas party’ allowance, HMRC do allow some exemptions for Christmas-related expenses and other entertaining, so we’ve got some top tips to help with your festive season spending.
What counts as ‘entertaining’?
HMRC defines ‘entertaining’ as providing free or subsidised hospitality. Examples might include food and drink, tickets to sporting events, accommodation expenses or use of capital assets. In most instances, the cost of entertaining is not tax-deductible and the VAT non-recoverable. The rules, however, are far from black and white, and knowing the ins and outs can help you make some quick savings for those situations where it does apply.
To start with, we should mention that even a disallowable expense will save you money. Though it won’t help to lower your corporation tax, it is still cheaper than paying out of your own pocket. The reason for this is that funds that come out of a business bank account are not subject to income tax, whereas if you were to withdraw those funds into your personal account they would be. Something to keep in mind next time you reach for your personal debit card during business hours.
Save on staff entertainment
HMRC only allows tax relief and the reclaiming of VAT on the cost of entertaining your employees, i.e. someone that is on the payroll and being paid a salary. Others, such as subcontractors, shareholders and former employees do not count.
As a limited company, if you are holding an annual Christmas party for your staff then you can claim it as an expense. You can even reclaim the VAT if you aren’t registered on a flat rate scheme. However, there are several conditions which must be met:
- The event is a regular event, such as a Christmas party. This isn’t limited to one event, you can hold several events in a year, provided they happen every year.
- The total cost of all events combined does not exceed £150 per head per tax year, including VAT.
- The event must be open to all staff members and must be primarily for entertaining your team (rather than your customers, family or friends).
If any of these conditions are not met, then the entire cost of the event becomes a taxable benefit and cannot be reclaimed. An example could be something like a one-off meal to celebrate a promotion, excluding other employees.
Remember that if you are a sole trader or in a partnership, you do not count as an employee. This is since legally there is no difference between you and the business, and you cannot claim tax relief on the costs of entertaining yourself.
Sadly, any costs put towards entertaining clients are a disallowable expense and cannot be deducted for corporation tax purposes. ‘Incentivising’ clients and buyers through dinners and gifts is disallowed by HMRC - even if this is the sole driver of your marketing strategy, it is seen as entertainment rather than marketing.
A way around this could be to create an official event with the same purpose, but including a proper program and maybe a talk or networking followed by refreshments. This then becomes part of your marketing strategy and can logically be considered a business expense, allowing you to claim relief on the event costs.
Business gifts to clients
Generally, client and staff Christmas gifts are considered ‘entertaining’ and are not tax deductible. HMRC will allow a business gift to be given up to the value of £50 to any one person, per tax year, provided the gift features a conspicuous advertisement for your company (for example a branded diary) and is not food, alcoholic drink, tobacco or vouchers that could be exchanged for these goods.
Clients and staff
As is often the case, office Christmas events include a mixture of clients and employees. This complicates matters, but you can still save money by claiming expenses for the costs of the employees. You need to calculate the costs and subtract the clients, as the clients are still a disallowable expense. If your employees are bringing guests, then once again you need to subtract them from your expenses, as only your actual employees count, not their guest.
To complicate things further, if the purpose of the employee is to act as a host for the clients then this is seen as client entertainment rather than staff entertainment, which means you can no longer expense the costs of that employee.
As you will have gathered, the rules around expenses are complex. The best way to ensure you’re not missing out on any tax-deductible Christmas expenses is to plan ahead and take advice from your accountant.
For more information or advice on business expenses, get in touch with our team today.