Companies that employ dozens of workers probably arranged their 2016 Christmas bash months ago. They mulled over the cost and aimed to keep it within HMRC’s £150 exemption so their staff won’t get hit with a benefit in kind (BiK) tax charge. But if you don’t have any staff, say, there’s just you, or you and your partner, you might be considering a less formal Christmas do, such as a meal and a stopover at a nice hotel. Will the exemption still apply in this situation?
What the law says
Unusually, the legislation spells out the rules to the exemption pretty clearly. S.264 of the Income Tax (Earnings and Pensions) Act says, “Where in the tax year only one annual party or similar annual function to which this section applies is provided for the employer’s employees…no liability to income tax arises in respect of its provision if the cost per head of the party or function does not exceed £150.” While there are a few more conditions, there’s no restriction on the size of business. Whether your workforce numbers 101 or just one, the exemption applies. What’s more, it stretches to guests meaning your spouse or partner can come along too – tax and NI free of course!
Company tax deduction
As far as corporation tax (CT) is concerned, it makes no difference whether or not the Christmas party is a taxable BiK. Either way it can claim a deduction for the cost. But this doesn’t mean you should plough ahead expecting to gain a financial advantage. The key to making this tax break pay is maximising the BiK exemption.
Trap. Go a penny over the £150 per head budget and the full cost becomes taxable. For example, say a company spends £300 for a Christmas celebration for its sole director/employee and their partner, married or not. The net cost is £240 (£300 less 20% CT relief = £240). The cost to the couple would be zero. But if the same company were to spend £301, this would trigger a tax and NI charge on the lot. The overall net cost to the company of providing a Christmas outing in this case would be up to £558.
While you’ll want to maximise the annual party tax and NI exemption it’s not always easy to be so precise with your budget. For instance, let’s say you didn’t factor in the after dinner liqueur. For the sake of a £5 snifter you might run up a tax and NI bill of up to £300. But there’s an easy way to avoid this trap.
Tip 1. The restaurant, hotel etc. should be booked in the company name and if there’s any danger of the £150 limit being exceeded the director should be authorised to pay the bill personally and claim back only up to £150 per head from the company – supported by receipts of course. This ensures the cost to the company stays within the exemption.
Tip 2. This strategy works no matter how many employees you have, but it’s probably only practical where you have a few and they are prepared to personally foot the cost in excess of £150.