It's December, and that means staff parties are on the horizon (if not over it). But what are the tax consequences of having a Christmas party?
There are three things to think about when it comes to festive entertainment. The first is employees; the second is anyone who's not an employee (which includes subcontractors) and the third is what happens to the cost of your own meal as the business owner.
Let’s look at each in turn.
If you give an annual Christmas party to which all your business's employees are invited, then check how much that party cost. If it was less than £150 per head, you may not have to report anything to HMRC or pay anything extra for the employees.
But if the party cost more than £150 per head, if you've already used up the £150 per head on another annual event such as a summer barbecue, if the party is not an annual event (e.g. to celebrate a big contract) or you don't invite all your employees (e.g. it's just for directors or managers), then the whole cost of the party counts as a taxable benefit.
You can't deduct the £150 per head and just look at the excess - it's the whole cost. You'll have to report it on forms P11D and pay Class 1A National Insurance on it.
Find out more about expenses and benefits for social functions and parties on HMRC’s website.
Many home-based businesses don't have employees. They work with subcontractors and other businesses. So what then if you decide to host Christmas entertainment for these people, your customers and anyone else?
There's generally nothing to report on forms P11D if the people concerned aren't your employees, but you can't claim tax relief on the cost of entertaining anyone who isn't an employee or the guest of an employee.
So in your accounts, the cost of entertaining subcontractors has to be recorded as business entertaining, and it doesn't reduce the amount of Corporation Tax (if a company) or Income Tax (if not) that your business pays.
If there's a mixed group of people at the party (some employees, some employees' partners, and some subcontractors), the cost of entertaining the subcontractors should be recorded as business entertaining and the cost of entertaining the employees and their guests should be recorded as staff entertaining.
And finally, what about you, the business owner? If you're the director of a limited company, then you're an employee and are treated the same way as described above.
If you're a sole trader, or a partner in a partnership, you're not an employee. However, in that case, the cost of your own meal, drinks and taxi home is not business entertaining, because legally you are the business and you can't entertain yourself! Instead, it would have to be part of the money you take out of the business, i.e. drawings.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.