Christmas is around the corner and many businesses will be thinking about how to reward staff and show clients and customers how much they value them.
HMRC, too, is not immune to yuletide jollity and treats some Christmas-related expenses as tax deductible. These can be parties, gifts and even decorations. However, there are limits and restrictions that any company owner or manager should be aware of.
Gifts for staff
Company owners can show their appreciation of worthy staff members with tax-free Christmas gifts but only up to £50 a gift. This can also be an average of the amount spent per head on treating a group of staff members. So, for example, the maximum tax free budget for sending off six staff members for a day out would be £300. If the cost of the gift exceeds £50 per head then the cost of the gift is no longer tax exempt.
To be tax free the gift must not be cash or a cash voucher. If it is, it counts as taxable earnings and will be subject to income tax and national insurance contributions. Gifts should be reported on the employee’s P11D form. They are ineligible for tax relief if given as part of a salary sacrifice agreement.
A gift must not be something the employee is entitled to under a contractual term or offered in recognition of any particular services, either given or anticipated. Employees may receive more than one gift each tax year tax free so long as each gift is worth no more than £50; thus, a tax-free birthday gift alongside a Christmas present is perfectly feasible.
However, this rule is subject to the qualification that where a company is regarded as‘ close’, for example, a small family business, the exemption is capped at £300 a year.
Gifts for clients and customers
These unfortunately do not attract tax relief just as business entertaining is not tax deductible. However, there are ways around the rule. If the gift has a promotional aspect – say a T-shirt or mug or calendar with the company logo on it – then so long as it doesn’t cost more than £50 it is tax deductible. But it’s not good enough to have the advertisement on the packaging – the item itself must bear it. And there is no exemption if the promotional gift is food, drink, tobacco or a cash voucher.
Companies can also give away unsold stock items but they must be worth less than £50 and be products that are ordinarily sold by the business. For example, food gifts can be tax deductible if the food product is sold by the business. So a bakery could get tax relief on free cakes to customers but not a Christmas turkey.
A more generous gift can be made tax free as part of the sale of something more valuable. So an electrical shop could gift a customer a set of headphones with a new TV or – or as food is not exempted here – could gift some festive food stuff, a box of mince pies or a Christmas cake perhaps.
A charity donation made at Christmas will be tax deductible as it would be any other time, whether in relation to corporation tax or for sole traders their income tax bill.
Christmas office decorations
The cost of brightening up the business premises with some decorations is an allowable expense, and should boost the spirits of the workforce as a reminder that a few days’ holiday are not far away. All decorations are claimable, whether a tree or lights or anything else. But the sole trader who works at home is ineligible as HMRC will deem the decorations to be at least in part for the personal enjoyment of the worker.
Christmas parties for staff
The annual bash to be eligible must be just that: every year, if not necessarily on the same day. Companies are not restricted to one party a year either; there’s no reason why a company couldn’t also have a summer party, one on the MD’s birthday, one to celebrate the anniversary of the founding of the company and so on. However, they must all be regular and recurring. The budget is £150 ahead (inclusive of VAT) and this includes guests of employees but it is an annual budget. Furthermore if the cost per head goes over £150 then none of the expense can be claimed. All costs should be included, whether on venue hire, food, drink, accommodation, travel or entertainment.
Companies can claim back VAT on party expenses but only on expenses that were directly on employees. So if a company party was attended by 30 staff and 20 guests then 60% of the VAT incurred can be reclaimed. To be claimable, the guests should not be clients.
Importantly, to be able to set off the cost of the Christmas party against corporation tax all staff have to be invited, so fancy dinners for top executives or favored sales staff won’t qualify. It is acceptable for companies to hold more than one Christmas event or hold them in different locations so long as no one is excluded.
The sole trader is at a disadvantage here: since he or she has no employees and therefore no colleagues to celebrate with, HMRC will not grant the £150allowance to single person businesses. So someone treating him or herself to a nice meal or other festive treat won’t be able to set if off against tax as HMRC deems the event as for the personal enjoyment of the individual.
Christmas parties for clients and customers
Business entertaining is subject to different rules from staff parties. Unfortunately, despite the importance of nurturing relationships with customers and clients, business entertaining is not an allowable expense. Of course this shouldn’t stop a company from showing its appreciation for valued relationships and it may still be worthwhile to host events for customers and clients even though no tax relief is available.
One part-exception to this would be hosting a promotional event for clients or customers, say to launch a new product or service. Although any food and drink provided would not be tax deductible, other expenses – eg, venue hire – should attract tax relief.
Unsure if an expense is allowable?
Companies, partnerships and sole traders are subject to different HMRC rules, and it is important to stay on the right side of them. If you have further questions about Christmas perks and expenditure and whether they are tax deductible.
Please contact our team for help and advice. As well as advising on reducing your corporate or income tax bill we also deal with VAT-related matters.
