Can I Claim Expenses for the Office Christmas Party?
It’s office Christmas party season, but can you claim any of the costs on expenses? Yes, you can but only if you stick to the rules.
Love it or loathe it, the Christmas party has become a staple part of the festive season. Whether getting together in the office or organising something on a slightly larger scale, this is a chance to thank staff and let them unwind. Unfortunately, it can also be expensive. According to Eventbrite, UK firms now spend a total of £1bn on Christmas parties, which is why many business owners find themselves asking if they can claim the party as an expense?
Normally, any staff entertainment would be treated as a benefit in kind. This means staff will be taxed on the value of the benefits they receive each year. As an employer, you will also have to pay extra national insurance on all perks you provide to your staff. When it comes to annual events, such as the Christmas party though, HMRC does make a few exceptions.
Back in 2003, they introduced a £150 exemption which means you can organise a party for yourself, your employees and their partners as long as the total cost per head does not exceed that £150 figure.
The rules are pretty complicated and you will have to ensure the party meets several conditions. Firstly, the party must be a regular annual event and not a one-off. The exemption only applies to your employees and their partners and it must also be open to all employees in the company. You can’t have a party exclusively for senior management and neglect all employees. If your business has several different branches across the country, you can hold separate parties in each location as long as all employees are invited to at least one party.
What the cost includes
Calculating the cost of the event is relatively straightforward. All you have to do is divide the total cost of each function by the number of people attending including non-employees.
Unlike some tax bands, this £150 limit does not rise with inflation. It has remained the same ever since it was first introduced, so in real terms it is becoming a little less generous every year. It covers everything from food and drink to accommodation and can be split across several annual events.
For example, you might decide to hold parties in the summer and at Christmas, both of which would potentially qualify for this exemption. However, the total cost per head across these parties must not exceed £150. Also, it is important to remember that this is an exemption rather than allowance, so if you go over the £150 mark by even a penny, you will not be able to claim for anything.
Of course, if you do run multiple annual parties over the year, the chances are that your total spend will have exceeded £150 per head. If that’s the case you may choose which of these events you wish to claim for. So, for example, if you had a summer barbecue which has a cost of £50 per head and a Christmas party which cost £140, you’d probably choose to claim on the latter.
VAT and gifts
If the party consists of food and drink, you should be able to claim VAT on the part that relates to your employees, and also your sub contract staff. However, this will not apply if the party consists of a different kind of entertainment, such as a trip to the cinema.
Gifts will be treated differently depending on the size of the gift and your business structure. You can make gifts to the same person without paying VAT as long as the total spent on the gifts is less than £50 over a 12-month period. If you’re a sole trader HMRC will treat it as a personal gift from you to an employee as long as the gift is genuine. On the other hand, for limited companies and partnerships the rules depend on what the gift is.
Freelancers and contractors
While the office Christmas party is now an established part of the calendar, more and more contractors are beginning to get in on the act. Remote working can be a lonely experience with many of your closest business contacts being managed entirely via email. It’s not unknown for contractors and freelancers to work with people for years without ever meeting them face to face.
A Christmas party might be an opportunity to do just that. If you have a team of people working remotely, for example, this could be a chance to come together. Equally, you could also deepen your engagement with clients by meeting them face to face and talking about future opportunities.
Setting up this event need not be hugely expensive. It could be as simple as booking a table or a function room in a pub. However, the way in which you treat the party for taxation purposes will depend on the way in which you work.
If you work as a sole trader or part of a limited liability partnership you will not be an employee, so you can’t claim your expenses back. This is not a business expense as you are entertaining yourself. However, if you work through a limited company you will count as an employee. Anyone else you employ will also come under the £150 limit.
Clients and other contacts, on the other hand, will not be exempt. You might hope to set this up as an allowable expense for business entertainment purposes, but the rules surrounding this are strict and quite complex.
HMRC describes business entertainment as hospitality which is provided free of charge or is subsidised for the recipient. Also, you must demonstrate that the event is purely for business purposes and that it is purely for the benefit of your contacts alone. As HMRC says, for example, you’d have to be “discussing a particular business project or forming or maintaining a business connection.”
This is a complicated process and the strict nature of the rules means one tiny mistake could ruin everything. It’s a good idea to speak to expert accountants and discuss your party beforehand. They can give you advice, make sure you have ticked all the boxes and ensure your festive cheer is as tax efficient as possible.