Contractors' Questions: Is my Christmas party tax free?
Contractor’s Question: Other than me, the only other employee at our limited company is the company’s other co-director. As there’s not much time until the festive holiday, and because there’s only two of us, we’re not having a Christmas ‘party’ as such. Still, I do want to arrange a celebratory evening out for the both of us. What are the allowances or tax implications if I do?
Expert’s Answer: The good news is that, unlike entertaining customers, the costs of entertaining employees are generally allowable against the profits of the business and will reduce your corporation tax liability.
In terms of the tax treatment for the employees themselves, it is often asked whether it is a perk of their job, and whether they have to pay tax on a benefit.
Generally, as long as the total costs of employee annual functions in a tax year are less than £150 (VAT inclusive) per attendee there will be no tax implications for the employees themselves.
In considering this limit make sure you have included all the costs, which may include not only the meal itself but also any drinks, transport and accommodation that you provide.
The allowance needs to be spent on staff entertainment so ensure you keep receipts for the expenses; you are not simply allowed to pay yourself £150. If you have a typical spreadsheet from an accountant, there is normally a specific column for the receipt totals.
But remember; staff entertainment is for life, not just for Christmas! The tax free allowance is an annual allowance so can be spent at any time during a calendar year. While I recommend you don't miss out on claiming yours, you should seek professional advice if your costs are over the £150 threshold.
The expert was Simon Dolan, managing director of SJD Accountancy.