Those emails and flyers telling you to book now for your Christmas do are already arriving in our inboxes (can you believe it!?), but don’t book anything until you know exactly what’s deductible for you or not as a small business owner, self-employed person, sole trader or freelancer.
Christmas, as we all know is the time for giving, but how generous is the taxman at this time of year and what can you expect from HMRC?
Well, HMRC does allow an exemption from tax and national insurance for Xmas parties if it’s an annual event, open to all employees and costs no more than £150 per head. Watch out though. If it comes to £151 per head you get absolutely nothing. Not even the first £150!!
You can also claim £150 for guests/partners of employees. So say your business has 5 employees, including you as a director, and each brings a guest. There would be 10 people at the event and as long as the total bill doesn’t exceed £1500 no tax charge would arise and the company can claim it as an allowable expense.
** Just a note if you have more than one party in the year then the £150 covers all of these not just Xmas.
What if you’re the only person in the business?
Then there’s some good news for you – you don’t have to be lonely this Christmas. If you are a director of your own company then you are an employee so the £150 applies and of course, you can take your partner along at £150 as well.
Unfortunately, if you are a sole trader or in partnership then HMRC are nowhere near as generous when it comes to the season of goodwill. Any money you spend on Christmas will be treated as your drawings as effectively you are entertaining yourself. Nor will the cost be deductible for the business.
Want to give gifts to your customers or staff?
Again there are quite specific rules here. Where the gift includes a conspicuous advertisement for the business, then that should be tax-deductible. However, if the gift is of food or drink then no deduction is allowed. So I’m afraid that turkey is off the menu. The same disallowance applies to vouchers which can be exchanged for goods. And a further restriction applies, in every case, in that the cost of the gift cannot exceed £50.
As for VAT, you should be able to claim the VAT back if the party includes food and drink for your employees, but not any other elements such as sleigh rides or pole dancing elves.
With gifts, you can claim the input VAT for staff and customers if acquired for business purposes. However, the £50 rule applies again. So if the cost of gifts given to any person in a 12 month period is more than £50 (excluding VAT) and you have claimed the input VAT, you will have to charge output VAT on the total cost of the gifts. In this case, it is probably easier not to claim the input VAT in the first place.
So there you go. Small business owners and particularly companies’ get a decent Christmas lunch whilst freelancers and sole traders are lucky if they get the leftovers. The taxman is neither Scrooge nor Santa, but you do need to take care not to get stuffed.
However, if you were able to attend a Christmas Party that by some miracle is also a networking event then the cost of the ticket is fully deductible for every type of business as the cost is for business development. So attending the Creative Entrepreneurs Club Christmas networking event is not only good for your business but fully deductible for tax. What better way to celebrate the holidays?
Best wishes for a tax-free holiday season!
Your friendly accountant,
Part of the Affinity Accounting Group