Warr on...

Employers are free to entertain their employees and the expenditure incurred in so doing qualifies for corporation tax relief. Furthermore, in most cases the employer will also be able to re-claim input VAT. The problem is that in general the gross expenditure incurred (before deduction of input VAT) is then taxable on the employees who have been entertained. An exception is the staff Christmas party. No benefit arises if the gross expenditure incurred does not exceed £150 per person attending. There are two important points to bear in mind. Firstly, if gross expenditure exceeds £150 per head the whole amount paid is a benefit in kind, not just the excess above £150. And secondly, the limit applies to the number of persons, not the number of employees, attending.

Owners of small limited companies may take advantage of the tax man's generosity and arrange a Christmas meal. For a 40% taxpayer the combined benefit of the VAT and tax relief will in effect halve the cost of the meal. At first sight this concession may not appear attractive to one person companies as such individuals will probably be reluctant to arrange a staff party at which they are the only person attending. This, however, is not a problem as, subject to the employer's approval, employees may invite guests. Therefore such a person may invite their spouse or partner. In theory an employee could invite a dozen people to attend a Christmas party, although in such circumstances HM Revenue & Customs may question whether there was some private motive for the expenditure totally unconnected with a staff Christmas party. There is no reason, however, why a controlling director should restrict themself to just inviting their spouse or partner to attend. They could perhaps also invite their children or parents. If four people attend they should ensure that the total cost of arranging the party does not exceed £600.

A relaxation in the rules allows employers to arrange more than one staff party, providing the total cost of all such parties in a tax year does not exceed £150 per person attending. For those who already have a busy social calendar in December the good news is that there is no need for the party to be a Christmas function. It can be arranged at any time of the year such as Easter, or it could coincide with the director's birthday.

The party does not have to involve food and drink. A visit to a theme park or a sporting event will qualify. Care needs to be taken to ensure that incidental costs such as travelling expenses don't take the total cost above the £150 per head allowance.

Date of Article: 6th December 2007