The Christmas festivity is in full spirits and you must be planning to throw a Christmas party to all your employees, isn’t it? What if you found that your Christmas party is landing you upto £160 per head? Worried, what to do? Just relax! As we are here to relieve all your worries as we can help you plan Christmas party which can give you some tax relief. Let’s go through this article:
Is my Christmas party for employees an allowable expense for business tax purposes?
You should know that the cost of staff entertaining is tax deductible as long as it is happening as a result to entertain others. If you were to invite your customers and suppliers to attend your party, be careful of the costs allocation on staff entertaining and supplier/customer entertaining, as the latter is not tax allowable.
Is my Christmas party for employees taxable on employees as a benefit?
This area has some complexity to deal with!
As the rule says the party is not a benefit unless it is an annual event, open to all staff and the sum of all such annual events in a given tax year does not go beyond £150 (inclusive of VAT) per head. Now let’s categorize and cover the following drawbacks:
Annual events to specify Christmas party or a summer barbecue. HMRC seem to specify this as a differentiating way between this and casual hospitality prevailing at regular intervals, whilst this has never been tested in such a context.
Open to all staff
Not every staff have to attend, but they all are eligible to attend. If you only throw the party to some members of a staff, it will be taxable on those staff members for such benefit.
Total cost don’t go beyond £150 per head—This area possibly has the most possible problems.
What is the cost per head?
Cost per head is the sum of headcount of all attendees which includes staff and their partners/family alike.
The event cost is from the starting to end and consists of the likes of transportation costs to/from the event and accommodation costs if these are given by the employer.
If the cost goes beyond £150 per head, it is the full cost that becomes a benefit, not just the small amounts in excess of £150 per head.
If you are having more than one annual event, then £150 per head is for the tax year, not per event.
For example : the annual summer barbecue which cost £50 per head and the Christmas party came to £110 per head, the whole £50 for the summer barbecue would be a taxable benefit for the employees who attended the event. It is advisable to pick and choose which events are best to use the £150 exemption.
What to do when your Christmas party costs you £160 per head? (taking into consideration employees and guests)
Normally, you have two alternatives here:
The Christmas party cost entitled to each staff member will need to include P11Ds(i.e. £320 if the staff member brought their spouse along with them). This will result in them to pay tax on this amount as if it were regular employment earnings, which is possibly to be unpopular with staff.
The business will also be accountable to pay 13.8% Employer’s National Insurance on the total benefit cost.
As an employer, you can agree with HMRC that you will include the tax and National Insurance via PAYE Settlement Agreement (PSA). This will definitely increase your party cost as a business.
For example: Your Christmas party costs you £1,600 which is attended by 10 people. Every staff member attending your party is a basic rate taxpayer. With a PSA at your place, the total cost for your business comes out to be £2,276(£1,600 grossed up for 20% tax to £2,000 plus 13.8% Employer’s National Insurance).
If in case all staff members were higher tax payers, the total business cost comes out to be £3,035 (£1,600 grossed up for 40% tax to £2,667 plus 13.8% Employer’s National Insurance).
If no PSA were in place, the total business cost would be £1,821 (£1,600 plus 13.8% Employer’s National Insurance) and the staff would have to bear the tax personally.
Is VAT recoverable on a Christmas party for employees?
If your business is VAT registered, then often the VAT is recoverable on business it is chargeable on business expenses. However, you’ll find VAT blocked on entertaining expenses and it is not allowable to reclaim VAT on entertaining costs.
This is a common error in small businesses, and one where the VAT inspector takes the responsibility in raising an evaluation for the wrongly claimed VAT along with interest and penalties.
The best part is there is no problem in a business to claim back VAT on an entertaining expense for a staff function, but to get entitled, the event must be actually to entertain or reward staff, you cannot claim the input tax where the employees act as hosts for non-employees, or if the role is only for directors or business owners.
Also, you require to be careful because it is only the VAT significant to staff that can be reclaimed, unlike the benefit in kind rules seek exemption which is applicable to both employees and the family members. This implies that if you have customers or spouses attending the event, you will need to do VAT allocation so that you can only claim the amount pertaining to the employees.
It is evident that this subject does not have any proper clarity as many people believe, and there are various issues to be known beforehand.