The Christmas Party and Tax (a Christmas Tale)
Once upon a time, in a festive land far, far away
Once upon a time, in a festive land far, far away from here, as Father Christmas readied his elves for the big day, the nice bosses of some businesses had gathered and were preparing to throw a Christmas themed get together to thank their staff for their hard work during the calendar year. However; these bosses were unsure as to what expenditure could and could not be put through the business with regards to this - after all, paying tax is the kryptonite of all small business owners, and, as we well know, this is an additional burden that they did not want to have to endure.
So these bosses got together and contacted Matt the tax fairy at Change Accountants, someone who they knew would be able to solve their taxation issues with sound advice and maybe even a pinch of humour and common sense!
Matt explained that the general rule is that the cost of staff entertaining is tax deductible for the business (YES!), as long as it does NOT include the incidental cost of entertaining others. If the bosses were to invite other business personnel, then careful consideration would need to be taken when apportioning the costs as the entertaining of these other guests is not allowable!
This was indeed tremendous news for the bosses. Not only could they let their hair down after a tough year filled the peaks and troughs that arise with the running of their businesses, but if they entertained their staff as a “reward” then the tax demon would also be reduced!
Matt calmed the nervous bosses with his effervescent demeanour, with similar grace to which the Gaviscon firefighters extinguish heartburn. He then went over the rules of Christmas parties with them, explaining that the general rule is that the party is not a benefit, so long as it is an annual event, open to all staff and the total of all such annual events in a given tax year does not exceed £150 (inclusive of VAT) per head. He then presented them with the following list of rules to help explain his point, which if adhered to, meant that Christmas parties could both be tax deductible and also not incur a benefit in kind:
Mat explained that a Christmas party didn’t need to take place at Christmas! The bosses were shocked but Matt illustrated that HMRC seem to interpret this as a way of differentiating between this and casual hospitality occurring at frequent intervals, so a one off night out was allowable.
Open to all staff
Matt explained to the bosses that not all staff have to attend. The grumpy ones could be left at home or the office but they all have to be entitled to attend. The bosses mumbled to each other and concluded it was not acceptable to tie up the dull ones to prevent them attending. If you only offer the party to certain members of staff (like those who drink heavily to get through the week), it will be taxable on those staff members as a benefit and the company tax demon will increase.
This one was a difficult one to fathom. Matt said that the £150 per head is inclusive of VAT and that the cost of the event is from start to finish, and includes the likes of transport costs there and back and also accommodation this is provided. Matt also had to illustrate that if the cost is in excess of £150 per head, it is the entire cost that becomes a benefit to the staff, not just the amounts in excess of £150 per head.
If the really kind bosses elected to have more than one annual event of this nature (strange but doable), the £150 per head is for the tax year, not per event. So if they chose to have an annual summer barbecue, and throw a few shrimps on the Barbie - which cost £50 per head and then the Christmas party came to £105 per head, then the whole £50 for the summer barbecue would be a taxable benefit for the employees in attendance. This confused the bosses further but Matt calmed their frustrations by adding that they are allowed to pick and choose which events best utilise the £150 exemption – in this case it is usually the most expensive one.
The bosses began to realise that there is much to be learnt during their time in charge and that you can never know enough whilst running a business. Matt’s knowledge had helped guide them down a path of no tax, which is every boss’ dream. They began to perk up at the prospect of a tax free christmas party, safe in the knowledge that if they followed the rules of the tax fairy, then their only worry would be if someone misbehaved and brought shame upon the company…
...Or snogged Peter from accounts (Bleurgh).
Matt returned to Change with a feeling of accomplishment, and told the other fairies there what he’d been doing. Lauren the VAT fairy was keen to stress the VAT implications of these parties, however it was decided that these rules are complicated and would only confuse the bosses further. So she has readied herself for any questions they may have, and has urged them to contact her directly on the fairy line.