Can I hold a Christmas party as a contractor and claim back the cost as an expense?

Christmas is almost here and we are well into the Christmas Party season.

So, writes Matt Fryer, managing director of Brookson Group, what are the HMRC rules governing contractors and Christmas parties?

As a contractor and director of your own limited company, you may be able to benefit from corporation tax relief on this expenditure.

Essentially, Section 46 ITTOIA 2005 provides a ‘let-out’ clause which means that entertaining staff is not treated for tax in the same way as customer entertaining, as it is deemed to be for staff welfare.

What your limited company can’t do for a tax-free Christmas party

But you are not allowed to invite any clients of your business to the Christmas party and the full cost will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.

There is no monetary limit on the amount that an employer can spend on an annual function, such as a Christmas party. However, if the annual party costs more than £150 per head, this will be an allowable deduction in the employer’s accounts, but the employees would pay tax on this amount as a benefit-in-kind (BIK), as HMRC would classify this as just another form of earnings. 

Seven key tax-free party takeaways

 The key points for contractor-directors to consider in respect of the £150 exemption/limit are summarised below:

1. You can spend up to £150 per head (inclusive of VAT) per year, in providing annual functions and events to entertain your staff -- so it is not wholly restricted to Christmas work parties. This means that the amount can be claimed against the company, without any Benefit-in-Kind charge being made to the recipients.
2. Costs include food, transportation, and accommodation. When added together, this is divided by the number of employees/attendees to arrive at the cost per employee.
3. The £150 is not an allowance and so if the cost per head works out at £160, then £160 is taxable as a Benefit in Kind and goes on your employees’ P11D, not £10.
4. The party must be open to all staff, not just directors.
5. If you are the sole director/employee, you can also invite along a ‘partner’ to your Christmas party, and the same £150 limit applies to them as well.
6.  There is no tax relief if an event is solely for directors and their families (unless you are the owner-manager or a family company and you happen to be the only employee(s)).
7. Other guests may be invited too, but the principal purpose of the event must be purely for the entertainment of all the staff.

VAT, bringing partners, and other considerations

VAT can be claimed on your Christmas party if only staff attend.

However, if partners of staff or guests attend the party, VAT recovery is restricted proportionately.

Over the tax year, we suggest that you calculate the cost or the total number of events including your Christmas party, and work out the cost per head, to calculate the most tax-efficient application of the £150 per head rule for your company’s employees.

We would always advocate speaking to your accountant if you are at all unsure of HMRC’s rules.

Finally, what about a non-taxing Christmas party for umbrella company contractors?

Lastly, on a separate note but still relevant to ContractorUK readers, if you are working as a contractor through an umbrella company, you are unable to claim for a Christmas party because you are employed by the umbrella company and it is unlikely that they will provide a Christmas party for their employees.