Christmas Entertaining – are parties tax deductible?

At this time of year, we are often asked whether Christmas parties are tax deductible or not?

Unfortunately, as with anything to do with tax the answer is not the same for everyone!

If you are a sole trader or in a partnership then the simple answer is no.

Legally, you are the business and you can’t entertain yourself, even at Christmas. You also need to eat to live and whether you eat in a Manchester restaurant or at home, it is your choice – the cost would count as drawings if you tried to put it through the accounts.

If you have any employees then the exemption described below can be used for them, but not for you.

Limited Companies

If you are a director of a limited company, however, you can claim an exemption to cover the cost of an annual function of up to £150 per employee per annum.

This could be split over a summer event and a winter one but they should be annual and the cumulative cost of both must be below £150 for it to be allowable.

Usually a Christmas (or summer) party would be classed as a benefit in kind and would be taxable on the employee (like company cars) but if the following is met there is not issue:

  • Must be annual event
  • All employees must be invited
  • Total cost (Inc. VAT) must not exceed £150 per guest. If it is £152 the whole amount will be chargeable as a benefit in kind

A way around this is to get a contribution from employees on the excess and just claim the £150 per head.

Entertaining clients and subcontractors

You can’t claim tax relief on entertaining anyone who is not an employee or guest of an employee. So any such expenses will be classed as business entertaining and you will not reduce the amount of profit and hence tax that needs to be paid.

Networking at Christmas

This is a grey area regarding whether it is just eating lunch and hence something that would “normally have been done at that time” (i.e. going out with a group of friends), or whether the main purpose and intention is for finding new business connections and having the opportunity to learn about other businesses and potential leads, then they are potentially allowable.

The intention is the key to deciding whether the expense is deductible or not.

Gifts to client

You can make a gift to a client up to £50 in any tax year.

There are some limits to allow it to be tax deductible – if not met it will be classed as entertaining

  • Must be business related (i.e. calendar, pens)
  • Cannot be alcoholic drink, food or tobacco
  • It must clearly show your business name (advertising)

Gifts to staff

All gifts are benefits in kind unless they are “trivial”.

These can be a bottle of wine, box of chocolates or a turkey, but not a case of wine or  hamper for example.

Any Christmas bonuses must go through payroll system as normal.

We did say that it was not straight forward, if you have any questions at all then please do not hesitate to contact us, our office is closed from Friday 20th December, reopening Monday 7th January.

We hope you all have a good Christmas and we look forward to working with you in 2014.