Contractors’ Questions: How to pay no tax on the Christmas party?

Contractor’s Question: My two-person limited company wants to put on a Christmas party imminently, but we’d like to invite the partners of both the director (myself) who will be attending and the company secretary. What would be the tax implications, and would those implications differ if we threw the party on New Year’s Eve?

The background is the company secretary and I normally have two boozy celebrations a year – one at Christmas and the other in the summer, but we didn’t do the summer one this year.

Expert’s Answer: The good news is that you can invite partners without any additional tax implications as long as you keep the cost within the tax-free annual allowance of £150 per head. The annual allowance covers the tax year to April 5th, so it won’t make any difference if you hold the party before Christmas or on New Year’s Eve, even if it spills over to the next day! Many businesses hold their Christmas party anytime between November and January so yours would fit within the definition of an ‘annual event.’

You may find that your summer party in future is not classed as an annual event unless you reintroduce it to your regular staff entertaining calendar. It may seem obvious but an annual event is one that takes place every tax year, or is planned to take place in future years, and HM Revenue & Customs have been known to try to deny this exemption for events that are irregular.

When looking at the costs of an event you should include transport and accommodation incurred as well as food and drink costs, but this sum must include VAT. Do think twice about splashing out on expensive champagne that you plan to expense to the company at a later date, as this would also be part of the £150 sum. If HMRC carry out a compliance review you will need to produce all your receipts from that event.

Generally though, you are in luck this year! Not having a summer celebration means you have a bigger budget for your Christmas party. The £150 per head limit is to cover all annual events, which would normally be your summer and Christmas bashes.

All four of you will be taken into consideration when calculating the cost per head. With your partners attending, the cost per head will be reduced. Bear in mind that, if the £150 is exceeded, you and the company secretary will suffer tax on the cost of you and your partners’ attending.

One way around this is to collect a contribution to bring the costs below £150. Alternatively your company could enter into a PAYE Settlement Agreement with the taxman to pay any tax liability on their behalf.

If you stick to all of the rules in this answer you can have a very tax-efficient Christmas party!

The expert was Jon Dawson, partner at Kingston Smith LLP.

 

Editor’s Note: Related Reading –

Contractors’ Questions: Can my World Cup final party be tax-free?

When clients blur your IR35 status

Contractors’ Questions: Is client Christmas party a red flag under IR35?

 

Friday 12th December 2014