Contractors’ Questions: Can I avoid the taxman at my Christmas party?
Contractor’s Question: How can my contractor limited company throw an annual Christmas party without incurring a tax liability? I understand that the cost per head has to be no greater than a set limit; but is that limit flexible? And is the tax exemption I’m referring to applicable to every person at the party, even guests who aren’t employees?
Expert’s Answer: The majority of UK companies employ many workers and so usually aim to keep the cost of any Christmas bash within the taxman's £150 exemption. This means that their staff will not be hit by a benefit in kind (BiK) tax charge.
The legislation is very clear. Section 264 of the Income Tax (Earnings and Pensions) Act states, 'Where in the tax year only one annual party or similar annual function to which this section applies is provided for the employer's employees...no liability to income tax arises in respect of its provision if the cost per head of the party or function does not exceed £150'.
So whether your workforce is 100 or just one, the exemption applies. In addition it stretches to guests, meaning your spouse or partner can come along too - tax and NI free!
But if you go just one penny over the £150 per head budget, the full cost becomes a taxable BiK - not just the amount over the £150. You must keep within the £150 limit.
However while you will want to maximise the annual party tax and NI exemption, sometimes it’s not so easy to be exact with the budget. For example your £5 'one for the road' last drink might result in a tax and NI bill of up to £300!
Fortunately there is a way to avoid this trap. Ensure you book the hotel, restaurant etc in the company name. If there is a possibility that the £150 could be exceeded, the director should be authorised to pay the bill personally. He /she can then claim back the £150 per head from the company but the claim must be supported by receipts. This ensures the cost to the company stays within the exemption.
The expert’s answer is an edited extract from guidance by Carrington Accountancy, a tax and accountancy specialist for one-person businesses.