It’s your (Christmas) party, and your limited company can host it tax-free if you want to!

For many companies, the Christmas party is the most eagerly anticipated event on the staff calendar as it offers the ideal opportunity to reward employees for their hard work over the past 12 months.

The same is true for contractor companies! But with new restrictions to stop the spread of Omicron now in force, and many companies being nervous to bring people together for a celebration, some Christmas parties may be celebrated in the virtual world this festive season.

Thankfully, the tax relief provided from HMRC against the cost of hosting an “annual event” (most commonly a Christmas party) is still applicable to virtual events, but with certain stipulations.

Here, exclusively for ContractorUK, head of technical, compliance and payroll at SJD Accountancy, Joanne Harris, explains how to benefit from this tax exemption and some of the things to beware to ensure you don’t end up on HMRC’s naughty list this year!

What is the Christmas party tax exemption?

Company directors can host an annual event for themselves and any staff they employ without any tax implications for the attendees, provided it meets specified criteria

If the below conditions are met, expenditure on events like Christmas parties will qualify for both corporation tax relief and VAT reclaim. This will not be regarded as a taxable benefit, meaning there is no P11D liability or personal tax to pay!

• The exemption covers the cost of accommodation, transport, food, and drink
• All staff must be invited to attend. Events can be restricted to employees in a specific location; however, it cannot be restricted to a certain job role or seniority.
• You can opt to host multiple events per year, but the total cost should not exceed £150 per attending employee (including VAT). If the cost of providing an event surpasses the limit of £150 per head, the full amount will be a taxable benefit.
• The event must take place -- a cash sum cannot simply be claimed without hosting an actual event.

The cost per head is calculated by dividing the total cost of the event by the total number of people in attendance (including non-employees).

While many companies choose to make use of this exemption with a festive celebration, it and can be used any time of year. It does however need to be a recurring event, for example a party to celebrate ‘10 years of trade’ is not annual and so the exemption would not apply.

Virtual events also qualify for the allowance

In 2020, HMRC made the decision to extend the exemption to include virtual events, following the government guidance issued due to the covid-19 pandemic.

This could involve hosting an online event where all employees are invited and provided with a hamper containing food and drink to be enjoyed during the event. Provided the total cost per head for this is within the £150 limit, the exemption still applies.

Even if you do opt to host the party virtually, you must also ensure that all the conditions listed above are satisfied. Claims should exclusively relate to the costs incurred for the hosting of the event of itself.

Staff entertainment, or client entertainment?

VAT can be reclaimed for staff entertainment. This means you can reclaim the input VAT on your annual Christmas party as HMRC will allow you to claim VAT for events that are  identified as “staff entertaining.”

There is a distinct difference between staff entertainment (including Christmas parties) and client entertainment -- for example, taking clients for a Christmas lunch.

Client entertainment will not qualify for corporation tax relief, and you cannot reclaim the VAT either. It is therefore important that you can distinguish between the two. A good rule of thumb for ensuring you don’t make a false claim is to ask yourself whether the same cost would be incurred in the absence of clients/customers. If so, this would be seen as staff entertainment.

To summarise, client entertainment is not tax deductible when calculating your corporation tax bill, and VAT cannot be reclaimed on this expenditure.

Finally this Christmas, don’t risk being on HMRCs’ naughty list

If you are unsure about how to throw a tax-free Christmas party or are unsure whether the event you have planned qualifies, it’s always advisable to speak to an accountant to ensure you remain on the right side of HMRC. Hearing from the taxman in the new year will not be a good start to your 2022!