It’s Christmas Party season and lots of you will be getting ready to go out and celebrate the festive season with colleagues. This gives rise to the question of tax relief and VAT reclaims…and it’s a confusing area that needs consideration.
Business Entertaining
Business entertaining relates to costs incurred for entertaining non-employees (for example, clients, directors, partners and, you yourself as a sole trader).
The HMRC definition of business entertaining is “providing hospitality of any kind”, including:
Food and drink
Accommodation
Theatre and Concert Tickets
Entry to Sporting Events and Facilities
Entry to Clubs and Nightclubs
Use of Business Assets
Entertainment only for directors or partners of your business
Business entertaining is not tax deductible and VAT cannot be reclaimed for entertaining anyone who is not an employee of your business. The only exception to this rule is where directors / partners attend a staff party together with the employees. HMRC may accept this as employee entertaining expenses - see section below.
Employee Entertaining
This relates to the cost of entertaining employees of the business, i.e. staff entertainment. As a sole trader you would NOT fall into this category.
Employee entertaining IS tax deductible and VAT can be recovered if you are VAT registered. Employees must be current employees, on payroll. Former and previous employees, as well as subcontractors and shareholders, do not count as employees for these purposes.
If you have a mixed party, containing current staff and previous employees, or current staff and a friend, then you would need to work out the split to determine what is tax deductible.
Employee Taxes?
A question often asked is regarding whether the employee entertainment gives rise to an employee benefit tax charge.
HMRC state that an annual event, such as a Christmas party, which is open to all staff and costs less than £150 per guest, would not be likely to be a taxable benefit for employees.
However - if the conditions above are not met then the whole cost of the event would become a taxable benefit.
Next Steps
As always please get in touch with us if you would like to discuss further.