As we approach Christmas, extra expenses such as dos and gifts can stack up and with a recession looming, it is crucial that business owners and sole traders are recouping wherever possible.
However, knowing which expenses are allowable can be complicated and expensive if incorrectly claimed, and hesitancy caused by this causes millions to go unclaimed each year.
Christmas parties are actually a staple in almost all work calendars, with some businesses even going the extra mile – literally – taking their employees abroad or to other parts of the country to reward their workforce for their efforts during the past year.
The good news is many Christmas expenses are tax deductible expenses and business owners are exempt from paying tax and National Insurance on yuletide entertaining. However, it isn’t always a straightforward process.
Each year, online accountancy practice for SMEs The Accountancy Partnership experiences hundreds of enquiries on the topic. Eight in 10 (81%) business owners admit to not fully knowing what qualifies as a legitimate expense, and this has resulted in an “expense hesitancy epidemic” that sees around £5.6 billion missed in unclaimed expenses each year, according to research on the topic.
When costs rise as a direct result of business, owners are eligible to claim the tax on these expenses back in their annual tax return. In the U.K, HMRC publishes guidance around what qualifies as a legitimate expense although it can be a complex topic. This results in 112,000 SMEs being hesitant to claim some expenses for fear of getting it wrong and being hit by hefty fines.
With the cost of business crisis continuing, ensuring expenses are thoroughly and properly claimed is especially important and could make a significant impact on overall business success and profitability.
Common Christmas Expense Queries for SMEs
Oliver Irwin, Accounts Senior at The Accountancy Partnership, lists the most common Christmas expense queries he and his colleagues at the firm frequently encounter during the holiday season, and provides answers so that business owners can ensure they aren't paying more tax than they need over the festive period.
1. Are Christmas parties tax deductible? Is there a limit on how much I can spend?
“In short, yes, the Christmas party is an allowable expense, but there are criteria that must be met to make it legitimate.
Tax for annual events is deductible up to £150 per employee per year, including VAT and any additional costs such as transport or accommodation. As the Christmas party is an exemption rather than an allowance, you do actually have to spend it, therefore it is crucial to keep costs under £150 per person because if it exceeds this, the whole amount will be subject to tax and National Insurance, not just the part above the allowance.
Just remember that the £150 is per individual, so if you have multiple receipts on the same day for the same event, like if you get a mixture of things paid for on the Christmas event, so long as you don’t spend more than £150 per individual across the total of the multiple receipts, the full amount yields tax relief.
In addition, the party must be an annual function and open to all employees. Management-only events, for example, are not valid for tax exemption.
For sole trader businesses, a Christmas party for one is still a legitimate expense if the conditions are met, so go out and treat yourself to a nice dinner this year. You deserve it.
It’s important to remember that this £150 is an annual amount though - if you’ve already had an annual event, you can’t get a further £150!”
2. Can I claim back tax on gifts for staff or Christmas bonuses?
“Gifts are common gestures from employer to employee, and even to clients and suppliers during Christmas time. They are also eligible for tax breaks as long as they’re within the limits and given purely out of generosity.
Trivial benefits, which are gifts under £50 with no resale value, are an allowable expense and are exempt from tax and National Insurance as long as they are not cash or a cash voucher, not a reward for employee performance, and not included in the terms of employees’ contracts. These must be reported to HMRC on form P11D.
Christmas bonuses given through standard payroll procedures count as earnings so should be added to the value of other earnings and subjected to Pay As You Earn (PAYE) tax and Class 1 National Insurance as usual.”
3. Are client gifts and entertaining at Christmas exempt from tax?
“Around Christmas time, many business owners choose to give clients and customers gifts or to take them for a meal or other similar entertainment. In some cases, tax does not need to be paid on this.
Client entertainment, whether you arrange and pay for it directly, through a supplier, or by reimbursing employees, is not an allowable expense. In short, this means you can’t claim tax relief on them when working out your taxable profits.
If any part of the client entertainment relates to staff costs – for example, a member of the sales team takes a client for a meal to discuss future business opportunities and pays for themselves and the client – then the employee's meal would be allowable for tax relief, but the client’s part of the meal isn’t.
In terms of gifts, business owners must be careful about what they give clients and customers as in some cases a gift might be classed as entertainment. Gifts must be a clear advertisement for the company, so the business name or logo needs to be clearly displayed.
Gifts cannot be food, alcohol, tobacco, or vouchers for any of those items as these are classified as entertainment. Tax-free client gifts have a maximum value of £50. As with party spending, this is an exemption, so spending any more than this will result in tax liability for the whole cost, not just the portion above the maximum value.”
4. Can I claim workplace Christmas decorations as an expense?
“If you have a non-home-based workspace, costs spent on decking the halls is an allowable expense that can be logged as a day-to-day running cost.
This covers everything from a couple of decorative baubles to a whole tree. Home offices, however, are not covered by this allowance.”
5. I like to make charitable donations at Christmas, can I claim tax relief on this?
“Gifts to charity are always corporation tax deductible for limited companies, no matter the time of year. Gifts can come in the form of money, equipment or trading stock, land, property or shares, employees on secondment and sponsorship payments.
Tax relief on charitable Christmas donations can be claimed by deducting the value of donations from your business profits before paying tax.”
6. How can I make sure my Christmas accounts are accurate?
“All business expenditure paid for via the company should be recorded via the accounts, to ensure all transactions are included and the accounts figures are accurate.
However, when it comes to tax relief, client entertaining costs are not tax deductible. In short, this means, whilst the costs can be included when calculating the accounting profits, they cannot be included when calculating the taxable profits. When calculating the corporation tax, any client entertaining costs have to be added back to the accounting profits and the corporation tax is then calculated on this basis.
If any part of the client entertaining relates to staff costs – for example, a sales team member takes a client for a meal to discuss future business opportunities and pays for themselves and the client – then the employee's meal would be allowable for tax relief, but the clients part of the meal would be added back.”
Expenses can be difficult to navigate and advice can be confusing. And Christmas expenses are no exception. However, educating yourself more on deductible Christmas expenses can help business owners to claim as much as possible while avoiding costly mistakes.