Contractors' Questions: Can my limited company fund both a festive lunch and a Christmas party?

Contractor’s Question: If I am the sole director of my own limited company, is it straightforward from an accounting standpoint to fund a small Christmas Party? I just want myself and my wife to attend the party, which we’d like eligible for tax relief. It will hopefully be in December but we were thinking of laying on a lunch as well. Please advise.

Expert’s Answer: The relevant HMRC rules on Christmas parties are not specific to Christmas, and as with many other of the Revenue’s ‘concessions’, the overall guidance is to use the amount if you wish -- but don’t go over the top. Metaphorically or literally!

In short, a normal trading company is allowed to offer hospitality-type events to its employees, and their partners, provided the events are offered to all equitably. So if employees’ partners are allowed, this shouldn’t be restricted to a certain grade of worker.  But for a contracting business, with one director who is also the only employee, this condition is effectively meaningless.

Does it slip over to the personal?

So, a business can arrange a work event, be it a Christmas party, Summer Ball or dinner or other event, provided it is not blatantly for another purpose. Perhaps a good example of this would be a Valentine’s Day dinner for a sole director and her husband -- a picky HMRC representative may feel that the purpose of the event has slipped over to the personal in those circumstances.

More than one event a year can be organised, and paid for by the company, provided it is open to all employees. The cost will be claimable against profits for corporation tax in accordance with the usual rules. However, normally events would be a taxable benefit in the hands of the employee – but there is an exemption here.

This HMRC concession allows events which are generally held annually to be exempted from a taxable benefit charge – P11D benefit – if they meet certain criteria. This is not an allowance to be ‘used up’, but a concession for qualifying events, up to a certain limit.

Pick the priciest one

One or more events, the total cost of which do not exceed £150 per attendee, including VAT, can be ignored for taxable benefits. If one event costs more than £150 per head, it remains taxable in full. If two events together exceed £150, the higher costing of the two can be claimed, assuming that one alone doesn’t exceed £150. 

For example, Mrs Joe Bloggs and her husband share a meal and drinks costing a total of £120 including VAT in the summer, and another meal and drinks costing a total of £220 including VAT in the winter. Both events are designated ‘staff entertaining,’ and the convention is that they occur annually. The total cost of the two events is £340 -- £170 per head which is in excess of the £150 exemption. 

Pay personally when close to the £150 limit

The concession allows Mrs Bloggs to select the more expensive event as the exempt one, and pay benefit-in-kind tax on the summer event. The £120 cost of the summer event would be dealt with via an entry on her P11D, covering the total benefit for her and Mr Bloggs. The remainder of the £150 per head is ‘lost’ – yet remember, it’s not an allowance, but an exemption. If there were three events in a year, and only one of them ‘crossed the threshold’ then that could be elected to be the only taxable one in that year. But all of that event would be a taxable benefit.

Lastly, don’t forget that if travel to the event is being met by the company, that counts towards the £150 limit – so if that tips the balance, pay for the taxi yourself! And as ever, for taxation reasons if nothing else, remember to put the business credit card away if you’re approaching the limit!

The expert was Chris James, director of accounting services at contractor payroll and accountancy firm JSA Services.

Thursday 8th Oct 2020
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Written by Chris James

Chris James BFP FCA is a Chartered Accountant who regularly speaks on taxation matters affecting Limited Company contractors, umbrella workers and the recruitment supply chain. He is head of accounting operations at JSA Group, one of the UK’s largest contractor accountants and umbrella services provider. Chris is also the current Chairman of the FCSA.
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