Contractors' Questions: Can my limited company fund 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 would like myself and my wife to attend the party, which would ideally be eligible for tax relief.
Expert’s Answer: As a contractor and director of your own limited company you can claim the exemption to cover the expense of an annual function or party of up to £150 per employee or director per annum. The provision of a party is regarded as a benefit in kind and would be taxable if the recipient is a P11D employee (i.e. one earning at a rate of at least £8,500 p.a.) or a director. No tax charge arises, however, if the conditions explained below are met. The exemption is only relevant in relation to P11D employees and directors, no taxable benefit is available if the partygoer is a P9D (i.e. earning below £8,500 p.a.) employee.
The rules are quite strict: it must be an annual event: so a summer ball, Christmas bash or New Year get-together is allowed but a one-off event is not. Note also that the event must be open to everyone in your workforce and cannot be a “director only” event; however, it could be the “Leicestershire office’s summer ball” whereby the London office may not be invited. The exemption also applies to employee’s or director’s guests: a guest includes a spouse, registered civil partner, children of the director or employee and clients, although including clients can impact on the way that VAT is reported.
The limit of £150 per director or employee (and guest as appropriate) includes VAT, so you must ensure that no more than £150 is spent. The entire amount need not be spent against a single event but could include two or three events, just so long as it does not exceed £150 per head in the tax year or per event; if you spend £151, you will be liable for the whole amount!
Please also note that this is an exemption and not an allowance, so you cannot claim £150 as a flat sum. Let’s say you spend £130 per head on a Christmas meal or on a New Year’s Party: you can only claim £130 as an expense and not £150 flat. As mentioned, the amount of £150 per head includes VAT as well as the cost of transport or accommodation (if needed), so please be careful with your calculations in this regard.
If, for example, you spend £130 (inc. VAT) per head on a great Christmas meal with entertainment, but travel and accommodation comes to another £60 (inc. VAT), your total costs per head will be £190 and the entire amount will be taxable to the director or employee, so do not cross the threshold of £150 or you cannot claim so much as a penny exemption. However, to avoid this problem, you could request reimbursement on the excess over £150 and claim the balance as an exempt expense. Alternatively, you could explore increasing the number of guests to lower the cost per-head; there are some good planning opportunities providing the sums are carefully worked out beforehand and you do not exceed the £150 threshold.
Example 1: John invited his wife, Helen, as his guest to his limited company’s annual Christmas dinner at £60 per head. Although Helen is not an employee of John’s company, as his guest, John can put Helen’s cost per head exemption against his £150 allowance. In this case, John can claim the full £120 for both himself and his wife as an exempt expense and no tax is payable. John now has £30 left over from his £150 allowance to put towards another event in that tax year should he so wish.
Example 2: Josh invited his wife, Joan, to his limited company’s annual Christmas dinner at £85 per head. Although Joan is not an employee of Josh’s company, as his guest, Josh can put Joan’s cost per head exemption against his £150 allowance. Josh, however, has exceeded the maximum exemption allowance by £20 and, as he had not requested a reimbursement, he cannot claim back any of the expense of the party; in fact he is liable for Tax and NIC on the whole expense of £170. This is not a good outcome, as it is just like paying for the party twice!
Example 3: Jeremy invited his wife, Maria, to his limited company’s annual Christmas dinner and spent £85 per head. Although Maria is not an employee of Jeremy’s company, as his guest, Jeremy can put Maria’s cost per head exemption against his £150 allowance. The maximum Jeremy can claim is £150, yet Jeremy’s company overspent by £20 per head. However, Jeremy realised that he had overspent and requested a reimbursement of £20 per head towards the Christmas dinner. The net cost was therefore £150 per head. So in this case, Jeremy could claim £150 as an exempt expense as the threshold of £150 per head was not crossed. By requesting the £20 reimbursement, Jeremy saved himself from paying Tax and NIC on the cost per head for himself and his wife, so this is a very good outcome.
In all of the examples given above, had John, Josh or Jeremy’s spouses also been directors of the same limited company then they too could claim the personal exemption. All three couples could in effect invite guests to make full use of their £150 per head exemption under the rules and not pay any tax or NIC. Potentially this exemption could see a host of events throughout the year, providing they do not exceed the £150 threshold per head, and if they do, reimbursement must be requested.
The expert was Sumit Agarwal, founder and managing director of DNS Associates, an accountancy firm serving contractors.
Editor’s Note: Further Reading - Contractors’ Questions: Can I buy my company secretary a tax-free gift?