Christmas parties: tax implications
It's December, and that means staff Christmas parties are on the horizon (if not over it).
What are the tax consequences of having a Christmas party? When does the government put on Scrooge's nightcap and hold its hand out for a share?
There's three different areas to think about when you're giving a Christmas entertainment. The first is employees, and the second is anyone who's not an employee (which includes subcontractors). The third is what happens to the cost of your own meal as the business owner.
If you give an annual Christmas party to which all your business's employees are invited, then check how much that party cost per head (for everyone who came, including employees' guests).
If the party cost less than £150 per head, you may not have to pay anything extra for the employees.
So let's say your business has 5 employees on its payroll (and remember that includes you if you're a director of a limited company).
All employees were invited to the annual Christmas dinner at the local gastropub. Everyone came and they each brought a partner, so there were 10 people there.
The total cost of the meal, drinks and taxis home (you have to include these if the company paid for them) came to £900 including VAT.
That's £90 per head - so within the £150 limit. You don't have to report that party on forms P11D or pay any extra tax and National Insurance. Breathe a sigh of relief and put the cost of the party to staff entertaining in your accounts.
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. Ouch!
More info on HMRC's website here.
But many home-based businesses don't have employees. We work with subcontractors, outworkers, and other businesses.
So what then if you decide to host a Christmas entertainment for these people, your customers, and anyone else?
There's no issue with 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 go 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 goes to business entertaining, and the cost of entertaining the employees and their guests goes to staff entertaining.
And finally, what about you, the business owner?
If you're the director of a limited company, you're an employee.
If you're a sole trader, or a partner in a partnership, you're not an employee. BUT in that case the cost of your own meal, drinks, taxi home, etc. 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.
Who said it was easy to host a Christmas party... and that's before we even think about the Rudolph slippers you really don't want to get in the Secret Santa.
- All features great and small
- Achievement unlocked: FreeAgent approved by HMRC to support Making Tax Digital for VAT
- Typeform data breach
- Case study: Andi’s got business in hand with the FreeAgent mobile app
- Reading to recharge: 5 small business books for your summer holiday