Can you believe it’s that time of year again! It feels like it was only 5 minutes ago when we wrote our last Christmas blog about Christmas gift ideas! So here we are again, the festive season is upon us and seeing that we are no longer restricted to what we can do with our colleagues and clients, we thought we better cover the bases of what you can and can’t claim for when it comes to entertainment and gifts.
Self employed/Sole Trader
As there is no legal differentiation between yourself and your business unfortunately you are unable to claim for client entertainment or gifts. Entertaining your clients or giving out presents over Christmas will be at your discretion, out of your own pocket and you will still be liable to pay for the tax on the amount you spend.
If you pay for any client entertainment or gifts from your business bank account, you would need to assign it to your drawings account and it would be disallowable for VAT and would need to be entered with a T9 tax code (outside the scope of VAT).
According to HMRC the definition of entertainment for Limited Companies is ‘eating, drinking and other hospitality’. Entertainment can fall into 2 categories;
- Business entertainment of clients – this is when you pay for entertainment whilst discussing business projects. In these circumstances you must fill in a P11D and you don’t have to deduct any tax or national insurance.
- Non business entertainment of clients – this is when you pay for entertainment of clients for social reasons only. You are still required to fill out a P11D but the cost will be subject to class 1A National Insurance.
As a limited company you have a few options to consider when it comes to client and employee entertainment and gifts.
An important thing to consider before paying for entertainment or buying gifts for your employees is that they are definitely considered an ‘employee’ of the business. If the member of staff is on your payroll and paid a salary then they are classed as an employee and may be considered for tax relief for entertainment expenses. Any one who freelances for you would not be considered as an ‘employee’ by HMRC.
HMRC considers staff entertainment to be an allowable expense which means that it is tax deductible. You can claim for food, drink, transportation, hotels, venue hire and any entertainment which you decide to hire. You are allowed to spend £150 per head per year on your Christmas gathering. It doesn’t have to be just one event, it can be various events but the total cost must not exceed the amount of £150 per employee. In order to be eligible for this allowance you must not exclude any employees.
If your business is VAT registered you can also recover any VAT incurred during the process and would use the appropriate tax code in Sage 50 Accounts e.g. T1 for 20% VAT.
As a Limited company you are allowed to give yourself and your employees a gift up to the value of £50 and it will not be subject to tax or national insurance. In order for it to be eligible to exclude NI and tax it must be a physical gift. If the cost of the gift exceeds £50 then it would need to be reported on a P11D and the total cost would be tax and national insurance deductible, not just the amount over £50. The business will not be able to claim these gifts as an allowable expense.
In order for gifts to your clients to be considered for tax deduction the gifts must be branded and display your company logo clearly. For example if you sent them a desk calendar with your business name and logo then the cost of this would be allowable for tax deductions. Gifts such as alcohol, tobacco, food and drink are exempt from tax deductions.
Can I give my employee a cash bonus tax free?
Any payment in cash that you give to your employees needs to be reported and classes as earnings. This means the value will be subject to tax and national insurance.
How about if my business doesn’t have employees but has a board of directors?
Unfortunately entertainment for directors of the business isn’t an allowable expense for tax deductions. Although if it means that the directors are away from home they would all be entitled to claim back the costs of overnight stays and food.
Christmas cards are indeed classed as a tax-deductible expense. However, as many businesses are now going paperfree to reduce their carbon footprint you may find it better to donate to your chosen charity.
“Any advice relating to accounts or tax should be sought from your tax accountant. Sage Accounts Solutions Limited will not be held responsible for any loss or damage caused as a result of the information contained herein.”