🍦How to get that tax-free Christmas Party...

Hey friend —

Crazy that it’s December already and that we’re not too far away from the holidays now. With that in mind, I wanted this penultimate newsletter of the year to cover off the grey area of ‘entertainment’ in business, how the budget for Christmas parties work and what it all means and how, if you’re a Limited Company, you can give yourself a little Christmas gift as well from the company to you and claim relief on it.

Annual Events: How to Make the Most of it

So the key here is that the event meets all 3 pieces of criteria.

1. It must be an annual event and something like a summer party, or more commonly, a Christmas party. It cannot be a birthday or a performance reward or something ad-hoc but it could technically be a company birthday, like your company is 5 years old or something like that for example.
   

2. All employees must be invited. It cannot be a select few like upper management or just the HR team - everyone must be invited. Not everyone has to attend if they choose not to but the initial invite and opportunity to attend must have been made.
   

3. The cost must be under £150 per head (inc VAT) for each person who attends per year. This means you could have a Summer Party AND a Christmas Party, and cap it at £75 per head per event and both would be allowable tax-free, claimable as an expense and no National Insurance to pay.

Okay, so we have 3 golden rules. So what happens if we break them?

If your event costs a tad more than £150 per head, it's alright. However, exceeding this limit would trigger a P11D and classify as a benefit in kind. That means that there would be income tax on the value of the amount which would most likely be adjusted in the employee’s tax code, while the employer would have Class 1b National Insurance to pay at 13.8% of the benefit. It also is not an allowance, but an exemption - so if the party is £160 per head, the whole £160 is taxable as a benefit, not the £10 over the £150 limit - make sense?

The same rule applies above if you break the other two rules - the £150 no longer applies though as it’s not an annual event or not everyone was invited, so now it just becomes a taxable benefit in general unless it’s under £50 per head. More on that below.

But what about if I’m a director only company or the only employees here are directors? Unfortunately, events exclusive to directors do not qualify for tax or VAT relief and so are not allowed to be claimed. That said, Directors can attend the annual parties above and fall within the £150 per head just like everyone else so long as the 3 rules are met and that would be okay as long as there were other non-directors in attendance.

On that note, with attendance and more importantly, who can attend, employees (and directors) are able to bring plus ones and they are also factored into the £150 per head amount. The plus one should be a partner or a family member though, although I’m not really sure HMRC are going to start interrogating that deep but just so you know the facts.

Lastly, this is only applicable to Limited Companies - there is no annual Christmas party exemption for sole traders or partnerships. Bah Humbug!

Trivial Benefits: Little Delights for Your Team

Trivial benefits are exclusively for employees, not freelancers or non-working shareholders.

They must be £50 or Less and they cannot be provided for in cash or as a cash voucher. They also must not be contractually obligated, and not related to work performance. However, outside of this, there are no limits or caps on how many trivial benefit events you can have in the year or per employee. So a meal out each month with the team, a team building day, etc. can all be factored in without worrying about tax and NI.

For directors of close companies, which is typically a company with fewer than 5 shareholders, they can enjoy up to £300 of trivial benefits annually. This can be used to put towards a gift from the company to yourself. Again, it cannot be cash, cannot be a cash voucher although it could be an experience voucher, like a spa day or something like that. It also needs to be £300 or under and cannot be a part payment towards a large purchase.

Putting it into Perspective: An Example

Scenario: Imagine treating seven employees to a delightful meal costing £335.

Benefit per Person: With some quick math (£335 ÷ 7 employees), each person's benefit comes to £48.

Result: In this case, it falls within the £50 limit, making it a trivial benefit. If it was over £50 and it wasn’t an annual Christmas party or not all employees were invited, then it would be a taxable benefit as well.

In conclusion, navigating staff entertaining and trivial benefits offers not only a chance to show appreciation but also an opportunity to enjoy tax relief. What better time to celebrate than around the holidays as well!

By understanding the rules and thresholds, you can create memorable moments for your team while making the most of these tax-saving opportunities.

Just FYI for Cone’s Christmas hours that we will be shut from Tuesday 19th December 2023 and will return on Monday 8th January 2024.

I wish you all a Merry Christmas and a Happy New Year!

Written and edited by Ben Nacca