At this time of year, we’re often asked about the tax implications of Christmas gifts and parties. Although the festive season may look a little different again in 2021, it’s an important time of year to reward employees and celebrate successes (or survival). Tax breaks are available in some areas that mean both the company and employee can feel the fun without feeling the pinch.

Christmas entertaining usually means food and drink but can also involve gifts or event tickets. As a genuine business expense, these can be included in your business accounts, regardless of who the gift is for, but be aware of the rules around the beneficiary of the hospitality.

Party time

Annual functions such as the Christmas party are exempt from tax up to a cumulative value of £150 per person. The event must be open to all employees and the cost per head includes room hire, entertainment, food, drink, transport or accommodation and any VAT on these expenses. The £150 per head also applies separately to spouses or other non-employed guests. If the party expenses exceed the limit, the party is classed as a benefit in kind and the employee would be taxed.

As a company director, you are included in the allowance, but if you are the only employee of the business, you cannot – so no parties for one. This exclusion from exemption also includes sole traders as you are not classed as an employee of the business. Another point to be aware of is that the £150 limit covers all functions, so if you also hold a summer party, this will be included in the exemption. 

Entertaining customers

In most cases, entertaining clients or potential clients is not an allowable expense for tax purposes, whether you are a limited company or a sole trader. If you are at a customer business meeting with an employee, your meals can be classed as subsistence rather than entertaining, but there are certain criteria for this classification.

In terms of VAT, if you are entertaining an overseas customer, as long as the expense is in relation to a ‘business meeting’, input tax can be claimed on the cost.

Employee Christmas treats

A cash gift or vouchers paid to employees as a bonus are taxable along with other income via the payroll or their P11D. Trivial gifts such as a turkey, an ordinary bottle of wine or a Christmas hamper with a value of less than £50 are not taxable. However, a more substantial gift could attract a benefit in kind charge that is reportable on the employee’s P11D.

A more generous gift or party?

If the total amount per head of your party and gifts, provided at the same time, come to no more than £150 then the usual tax rules won’t apply. It is possible to take advantage of the Annual Parties Exemption for functions costing up to £150 or as an employer, you can enter into PAYE Settlement Agreements to settle any tax and NIC on behalf of your employees for more expensive functions, or where a subsequent function takes you over the cumulative limit.

To understand the ins and outs of Christmas expenses and plan your costs better, speak to an expert at CRM on 01865 379272.

Sage Accountant Partner Logoiris kashflowFreeagent