The Christmas expenses you can claim for through your business

No one likes a Grinch, but before getting too carried away with Christmas festivities, our article aims to serve as a reminder of how to stay within HMRC’s rules when it comes to the Christmas expenses you can claim for through your business. It’s nice to see that even the tax man will get into the holiday spirit and allow for some tinsel as a tax break!

Can I claim the cost of Christmas decorations through my business?

Adding some festive cheer to the working environment can make a big difference in boosting morale, especially when we’re heading towards the end of the year and the days are all round much darker. That’s why you’ll be pleased to know that the cost of purchasing Christmas decorations through your business is tax-deductible and will help lower your corporation tax bill. Christmas decorations expenses claimed through your business can be accounted for as part of your day-to-day running of business. Everything from Christmas trees to wreaths and lights is an allowable business expense but we would recommend not going too over the top. However, the rule when it comes to claiming for Christmas decorations as an allowable business expense is that they must be for a workplace that is not your home. If you work from home, then HMRC will likely see that the purchase of Christmas decoration is for your own personal enjoyment rather than as part of running your business.

Can I claim the cost of throwing a Christmas party for my employees through my business?

Throwing a Christmas party is a great way to celebrate your employees and show them your appreciation for their hard work. What’s good is that offering your team a party is not considered as a benefit-in-kind by HMRC. That means that not only does the cost of throwing the party reduce your corporation tax, but you won’t have to pay Employer’s NI on the value of the party and your employees don’t have to pay NI or income tax. It’s certainly a win win for all.

To be able to claim the expense of your Christmas party through your business, you do have to follow certain rules:

• The Christmas party must be an annual event. If you decide to throw a party one year, you need to continue to do so each following year. This does not mean that it must be held on the same day each year, but it needs to be an annual function such as a Christmas party. This does however mean that it’s not exclusively Christmas parties which are tax-deductible but any annual business event such as summer party or anniversary of the business party.
• The maximum budget you can spend on your Christmas party is £150 per person (inclusive of VAT). You can further extend this budget per person where employees are allowed to bring a guest to the party. The guests can include friends or family but should not be valued clients/customers, suppliers, or other business contact. It is important to take note that this is an annual budget to cover all business events and not a budget per event. The budget must cover all inclusive costs of the party including hiring a venue, food and beverages, entertainment, as well as travel and accommodation where applicable. What happens if you do go over the budget is that the entire cost becomes a benefit-in-kind and therefore liable to NI and income tax. You cannot simply deduct £150 and pay tax on the excess as the budget must be treated as a maximum threshold and not an allowance.
• VAT can be reclaimed on Christmas party expenses, but only those expenses which are directly related to employees and not their guests. To practically apportion this, we would suggest that you simply take a percentage ratio of guests to employees and apply to the total VAT. For example, if a total of 70 employees attended your annual event and 30 guests were in attendance, then 30% of VAT bill should be paid whilst the 70% can be reclaimed.
• Every employee in the business must have the opportunity to attend the Christmas party. This means you cannot simply invite the top performing employees or senior members of the team only. Whilst you cannot exclude anyone who is on the payroll, you are able to hold multiple Christmas parties which are dedicated to employees from a specific branch locations or departments if you are a sizeable organisation.

If you are the only person working in your business, for example, you’re a sole trader, business partnership or sole company director with no employees, then unfortunately HMRC will not allow use of this budget for an annual celebration. You won’t be able to take yourself out for a nice meal on the business and treat it as a staff party as it’ll be seen as purely for your own enjoyment rather than for work.

Can I claim the cost of throwing a Christmas party for my clients/customers through my business?

Maintaining customer or client relationships is crucial for any business. Christmas is a great time to touch base with them and show your appreciation, as well as it often being a key time to boost sales. However, the overall rule is that client or customer entertainment is not a tax-deductible business expense. This doesn’t mean you can’t throw a party for them – it simply means the cost of doing so will not reduce your corporation tax. This shouldn’t necessarily put you off, and you should consider whether nurturing those relationships would be worthwhile doing so even without the tax relief.

You may be tempted to find a loophole to this rule and hold a ‘promotional’ event such as a party to launch a new product. Whilst this is arguably a legitimate business function, and certainly some of the expense will be tax-deductible, our advice is that in most circumstances, any element of ‘hospitality’ including food and beverages will be disallowed and you should not claim the expense through your business. 

Can I claim the cost of Christmas presents for my employees through my business?

A small token to show your appreciation can go a long way especially during a time of year when business may be busier. However, the key to this is to provide a ‘small’ token as HMRC specifies that you’ll only be able to claim the cost of Christmas gifts to employees through the business where the gift does not exceed £50 (including VAT).

In addition to this budget rule, the gift itself cannot be cash or a cash voucher such as a gift card with monetary value. Doing this would be considered as a cash bonus which would then be liable to income tax and NI. On the other hand, a gift card which enables the employee to redeem for an experience or product would be acceptable.

Again, this rule is to be treated as a threshold as opposed to an allowance. If the gift exceeds £50 then the whole amount will be taxable. However, did you know that this rule is not exclusively restricted to Christmas gifts? In fact, you can give as many gifts throughout the year as you would like so long as it stays within the budget rule, is not given to them as recognition of their work performance, and is not a benefit due to them as part of a salary sacrifice agreement. This means you’re free to give birthday gifts or other gifts on congratulations as often as you feel appropriate.

The exception to this is if your business is a ‘close’ company. If a director of a close company receives a gift, then this can still be claimed through the business so long as it does not exceed the £50 rule and the exemption is capped at a maximum of £300 for the tax year. That means that the director can receive multiple gifts throughout the year, but not more than £300 worth.

Can I claim the cost of Christmas presents for clients or customers through my business?

In general, business gifts for clients and customers are treated in the same way as business entertainment for clients and customers; which is that it is not an allowable expense that you can claim for through your business. However, there are some exceptions granted by HMRC that will let you get around this if you would like to give gifts to business contacts over the festive period.

Promotional gifts which contain a business advertisement on it and costs no more than £50 can be claimed as a tax-deductible business expense. It’s important to note that the advertisement must be on the product itself as opposed to simply on the packaging. Items such as branded mugs, pens, diaries, calendars, etc would qualify. To remain exempt, the product cannot be food or beverage items, tobacco, or a cash voucher. The budget of £50 applies to an entire financial year, so it would not be possible to gift the same contact multiple gifts worth £50 each.

Another exception to the rule is where you are giving away stock items that your business would usually sell. The value of the product still needs to be within the £50 budget, but if you are giving away products as a free sample, then food or beverage items may qualify so long as it is a usual product that would be available for sale as part of your business. For example, if you run a bakery and you offer a free cookie to every customer during December as a Christmas promotion, this would be tax-deductible. However, if you were to give a box of chocolates instead which would not ordinarily be for sale at your bakery, then this would be a disallowed expense.

If you are looking to offer a more generous gift, then you may be able to do so where the gift is given as part of a sale. Where this is the case, the £50 budget does not apply so long as the sale of the item covers your cost of the gift as well. Not only that, but you can also give gifts of food and beverage under these circumstances. An example would be where a customer purchases a new car from your dealership and as a Christmas token you gave a gift of a hamper with food and beverage items that came to the cost of £100. The total sale of the car would also cover the cost of the hamper and is only gifted as part of the sale so would be an allowable expense.

Finally, where you want to make a gift to a registered charity for Christmas through your business, this will be tax-deductible. For limited companies, charitable donations will reduce your taxable profits but it is not possible to add Gift Aid on top. For sole traders, any gifts to charities will not be a business expense but will offset any personal income tax liability.

Get help with Christmas expenses for your business

No matter whether you’re a sole trader, partnership, or director of a limited company, if you’re finding yourself struggling with keeping on top of business expenses then you may find our bookkeeping service helpful. We’re also able to support you with VAT returns if you’re VAT registered. Use our contact form to get in touch and find out more.