Your company is celebrating 25 years in business with small gifts to customers and a party for your staff. What tax deductions is it entitled to for the extra costs it incurs?
Celebrating business milestones with staff and customers is relatively commonplace. It can be quite costly and made more so because of the tax consequences. In this article we look at all the angles you should consider if you intend to spend money on a key business event.
Marketing, advertising, etc.
Celebrations might include spending money on marketing events and giveaway items such as t-shirts, pens, etc. Tax deductions from profits are allowed for the corresponding costs subject to conditions, in particular those relating to business gifts.
Tip. If there is a clear link between a gift and promoting your business, the legislation says that its cost is tax deductible. However, there are exceptions. A tax deduction is not permitted for gifts of food and drink, or where the cost per head per annum exceeds £50.
The party
There are two tax issues for the company to consider in respect of the event: the deductibility of the cost, and whether it will result in tax and NI liabilities for its employees.
Tax deduction. The good news is that your company is entitled to tax relief for the cost of the party. While tax rules usually mean that business entertainment costs, including those related to throwing a party, are specifically excluded from tax relief, there’s an exception for staff entertainment. Tip. The exception extends to other guests, e.g. spouses etc., who accompany employees. HMRC’s view is “In practice, the definition of “employees” is extended to include retired members of staff and the partners of existing and past employees. It does not include staff of associated companies or other companies in the same group.“
Tax for employees. The bad news is that HMRC’s largesse doesn’t extend to the tax and NI liability of employees attending the party. Each employee will be taxable to a benefit in kind (and a corresponding Class 1A NI bill for the company) equal to the average cost per head of the event. Trap. It has been suggested that the special exemption for parties and similar events can apply. This is incorrect. The exemption, which is limited to events which cost no more than £150 per head, only applies to annually recurring events. It cannot apply to a one-off event such as our subscriber’s 25th anniversary bash.
Accounting for the tax and NI
Naturally, you won’t want the employees to be landed with a tax bill for attending the celebratory event. The simplest way to avoid this is for the company to pay the tax on the benefit in kind via a PAYE settlement agreement (PSA) with HMRC. The deadline for doing so is 5 July following the end of the tax year in which the event takes place.
The company can claim tax relief for gifts to customers as long as the items aren’t food or drink, include clear advertising and their cost does not exceed £50. The cost of the party is also tax deductible but will result in a taxable benefit in kind for employees. The company can choose to pay this tax through a PAYE settlement with HMRC.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.