Is the Christmas Party for Your Company Tax-Deductible?
The government has announced that it will extend the tax relief on employee entertainment allowances to include virtual events. A spokesperson for HM Revenue & Customs told us: “As part of our ongoing commitment to help businesses during this difficult period, we’ve introduced a temporary extension to the taxation of employee entertainment allowances for companies hosting virtual events.”
However, the rules around what constitutes a ‘virtual event’, and therefore qualifies for relief, are very strict. For example, the event must take place online, via video conferencing software. In addition, the event cannot involve live audience participation.
In addition, the event must take the form of a seminar, conference or workshop. Events involving food or drink, or those held outside of the UK, are excluded.
If your company holds a Christmas party, you may qualify for relief under the following circumstances:
1. Your company hosts an annual event.
2. You hold the event in person.
3. The event takes place within the UK.
How does the exemption of £150 per person work?
If you are running a fundraising event, you could save money by claiming back some of the expenses against income tax. But there is one big catch – you must hold the event outside normal working hours. In fact, you can’t even use the venue during lunchtime. To qualify for the exemption, the event needs to run for longer than four hours. If you do hold the event outside normal office hours, you can claim back the following costs:
• Travel expenses
• Food costs
• Entertainment costs
• Insurance
• Refreshments
• Venue hire
What about a VAT refund on the party expenses?
Reclaiming VAT on the costs of attending a party isn’t always straightforward. In some cases it might even be impossible. For example, if you are a director or partner, the company doesn’t have to pay VAT on the cost incurred by you. However, if you are an employee, the company does have to pay VAT on your party expenses. This article explains how to calculate what VAT needs to be reclaimed.
The rules governing VAT apply to both employees and directors/partners. If you are a director or a partner, your employer pays the VAT on the cost of the party. For example, if the event costs £1,000, your employer will pay £100 worth of VAT. If you are an employee, you can claim back the VAT you paid on the party expenses via your payroll system.
If you are a director or part of a partnership, you don’t have to worry about claiming back VAT because your employer already covers it. However, if you work for a limited liability company (LLC), you do need to make sure you claim back the VAT you spent on the party.
How much VAT should you reclaim?
In most cases, it is enough to claim back the amount of VAT you paid on the expenses of the party. In fact, the HMRC suggests that companies should reclaim the full amount of VAT they paid on the party expenses, regardless of whether they are employees or directors/partners.
However, if you are a sole trader, you don’ t have to reclaim VAT on the party expenses. Instead, you just need to keep track of the money you spend on parties and submit a self assessment tax return every year.
When calculating the VAT you should reclaim, bear in mind that the following factors could affect the amount you need to reclaim:
Virtual events are also allowed
The government has announced that virtual events held outside the UK will be exempt from VAT under certain circumstances. These include meetings where the total amount paid does not exceed £10,000 per annum. In addition, the event must take place within the EU.
This announcement follows the publication of draft guidance earlier this month that stated that “virtual events do not constitute ‘events'”. However, it did say that there could be exceptions to this rule, such as those that involve “a single physical location”.
In response, the British Retail Consortium (BRC), which represents retailers including Amazon, Marks & Spencer, Sainsbury’s, Tesco, Waitrose and John Lewis, welcomed the news. “We welcome today’s clarification that virtual events are indeed covered by VAT,” said BRC chief executive Helen Dickinson. “For many businesses, holding a virtual event is a great way to reach customers across the world, without having to spend thousands of pounds on travel.”
However, she added that the exemption still needs to be clarified further. “Our members are keen to ensure that they are able to offer customers the best possible price and experience when buying goods online and we look forward to working with HM Revenue & Customs to make sure that the rules work effectively for everyone.”
Tax-efficient protection via your own limited company
The festive period is upon us, and many people are looking forward to celebrating Christmas with friends and family. But what about those who don’t want to spend money on gifts, food or drinks? There are plenty of ways you can make sure you’re tax efficient during December. Here are three tips to help you protect yourself against unnecessary spending.
1. Hosting a Christmas Party
If you’ve got a few hundred pounds spare, why not host a Christmas party? This is an excellent way to entertain guests without breaking the bank, and it’s one of the easiest ways to save cash. If you plan ahead, you’ll be able to find some great deals on venues, entertainment and catering.
2. Deducting Costs Associated With Your Own Limited Company
You might think that there’s no way you could claim expenses incurred while running your own limited company. However, HM Revenue & Customs (HMRC) does allow you to deduct certain costs associated with setting up your own limited company. These include things like legal fees, incorporation charges, annual subscriptions to online accounting software and even printing invoices.
3. Check With HMRC Before Booking Any Entertainment Services
There are lots of companies out there offering entertainment services such as DJs, live bands and magicians. Many of these businesses offer free trials, so you should always ask about how much the trial cost before signing anything. If you do decide to go ahead with the contract, you’ll need to ensure that you pay the correct amount of VAT, otherwise you’ll end up paying more than you should.
Frequently Asked Questions
What happens if your event(s) cost per person more than £150?
If you exceed the £150 limit for each individual attending your event, then there are essentially two options.
The first option is to declare the benefit to the employee on their Form P11d. This will give rise to an income tax liability for the employee, and a national insurance liability on the employer. If the employer wishes to avoid creating a tax liability for the employees, it can enter into a PAY E settlement agreement with HM Revenue & Customs whereby the employer agrees to pay the tax and NIC liabilities on the grossed up amount of the benefit.
Any such agreement must be applied to before the 6th July, following the end of the tax year and preferably well beforehand the deadline.
The second option is to cancel the event. In this case, you would need to notify the employee and provide them with a full refund.
How to reclaim holiday party costs
If you hold a Christmas party for employees, you could use the money to offset your corporation tax bill. If you run a small business, the cost of a Christmas party can often be covered by the amount of profit you make over the course of the year. However, there are some rules about how much you can deduct.
The first thing to do is check whether you qualify for the relief. You must have held a party during 2017 and incurred costs associated with it. These include hiring entertainment, food and drink, gifts and decorations. You also need to keep records of what you spent and provide them to HMRC.
You can claim up to £5,000 per employee as a deduction against your corporation tax liability. This includes the cost of food and drinks, entertainment, gifts and travel.
To qualify for the relief, you must have paid no income tax in the UK in 2018. Also, you cannot already claim the relief on your previous tax return.
