As a contractor you may well get invited by your end clients to join in their Christmas activities but as a contractor working through your own limited company there may be some tax breaks possible for holding your own.
As a contractor you are probably used to being told by your accountant that various costs including most entertainment are not allowable for tax purposes but special rules exist for limited companies holding their own Christmas Parties.
The special rule is actually in relation to regular annual events and for most this means the Christmas Party but it could be a summer event instead or as explained below both.
Taxable Benefit in Kind
In general the rule means that there is no taxable benefit in kind for regular annual events where all staff are invited provided the cost does not exceed £150. If there is more than one annual event i.e. a Christmas Party and a Summer Party then provided combined they don’t exceed £150 per employee then no taxable benefit exists.
If you exceed the £150 allowance on one party then the whole amount becomes taxable. If having 2 events the combined exceeds £150 then one would become taxable (you’re best to make the lower value one taxable provided the most expensive is below the £150 limit).
Further good news is it is also possible to invite your partners and they receive their own £150 allowance. However if the cost per head exceeds the limit then their cost is added to your benefit.
The cost per head is the total cost (including VAT) of the event (including travel and accommodation that is paid for) divided by the number of people who attended (i.e. including partners).
Tax Deductible for your Business
Further the cost of staff entertaining is allowable against your businesses profit, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers. Normally a Christmas or annual party for staff/retired staff and partners meets this criteria.
Reclaim VAT on Christmas Party Cost
If you are VAT registered then the VAT relating to the employees cost is reclaimable. The amount related to partners is not. If you are in a Flat Rate Scheme (as most limited companies ran by contractors are) then you do not reclaim VAT on costs on expenses so this would not be reclaimable.
Umbrella help Contractors to maximise their earnings, compliantly. For further advice please call 0800 121 6513.