Tax relief and exemptions for annual parties, gifts, and donations
It’s that time of the year to celebrate and share your joy, especially since this could be the first time after the pandemic for many of us to have a full-on festive party (and in person!). We want to highlight some tax reliefs and allowances for annual events, small gifts to employees or directors, and charitable donations, as many of you are supporting your charities and local communities during this living costs crisis.
Annual events are not just for Christmas
Your limited company can claim its annual party any time in the year as deductible expenses for corporation tax purposes. However, there are a few conditions that must be met to ensure the event is exempt from tax.
All staff must be invited
The cost of entertaining your employees, so long as it’s not incidental to the entertainment of others, is deductible for tax purposes. To be able to claim on your annual party, you must ensure total company inclusion. All of your employees and directors must be invited to attend for the event to be tax-free. For example, if you had a ‘directors only’ party, this would not be exempt from tax because it is not open to all employees. If you are a one-man-band company, you can still enjoy a festive activity as a deductible expense.
Entertaining clients and associate
Client entertaining generally is not allowed for corporation tax or VAT purposes. You cannot claim annual event expenses if you only entertain clients and associates. If you do choose to invite clients or associates to an event for employees, it is important to apportion the costs for tax purposes.
£150 spend per person
You have £150 (including VAT) to spend per head and can include plus-ones for employees. VAT on the cost is recoverable, but please note that guests need to be charged a nominal fee for the full VAT to be recoverable. The fee is subject to output VAT, which must be included in the company’s VAT return. To get the total figure per head, you need to add up all the party costs, including transport and accommodation, then divide it by the number of attendees. What’s more, please make sure you have a receipt for the expenses you are claiming.
But this is an exemption, not an allowance
Remember that the £150 spend is an exemption, not an allowance. What this means is that you must spend the money to make a tax claim. It cannot be requested as cash or a cash substitute. So if you’re a one-man company; but do not want to go for an annual dinner by yourself, you cannot claim £150 in cash or cash substitute such as shopping vouchers. You must also ensure you keep all receipts that you want to claim expenses for.
Don’t overspend
The overall cost of all events must not exceed £150.00 per head. Even if you go over by just £5, you can no longer claim the tax exemption. If you overspend, the entire cost will be treated as a benefit-in-kind (BIK) and subject to additional tax and national insurance.
Gifts also do not have to be seasonal
Small gifts such as wine and chocolate that were given to employees and directors can be exempt from tax as trivial benefits providing the following conditions are met:
The cost of providing the benefit does not exceed £50 (including VAT).
The benefit is not cash or a cash voucher.
The employee is not entitled to the benefit as part of any contractual obligation.
The benefit is not provided in recognition of particular services performed by the employee as part of their employment duties.
However, if the cost of providing the benefit exceeds £50, the full amount is taxable, not just the excess over £50.
For Directors and other office holders of close companies (a close company is a limited company with five or fewer 'participators', or a limited company of which all the 'participators' are also directors. For example, contractor’s PSCs are close companies), these £50 tax-free trivial benefits provided by the company must not exceed a total of £300 altogether.
Helping those who are in need
Charitable deeds can potentially be enhanced by tax relief or even increase the amount you donate without having to put in more yourself:
Donating from your company
Charitable donations to registered UK and EU charities are deductible for corporation tax purposes. You can claim tax relief (19%) by deducting the value of your donations from total business profits before your company pay tax.
Donations are not limited to currency and sponsorship payment, it can also be in the form of an employee on secondment, i.e. if your employees volunteer to work for charity during working hours, you can continue to pay their salary through PAYE and deduct the cost of your companies profit as if they were working for your business.
Making personal charity donations
Provided you are a UK taxpayer and your contribution is not more than 4 times what you have paid in tax in that specific tax year; making a personal donation through Gift Aid is one of the most tax-efficient ways to give back. Donating through Gift Aid means charities and community amateur sports clubs (CASCs) can claim an extra 25p for every £1 you give.
If you pay tax at a higher or additional rate, you can claim the difference between the rate you pay and the basic rate of your donation. For example, if you are a higher tax-rate payer and donated £100 to a registered charity, the charity will receive an additional £25 from the government, which increases your donation to £125. You can then personally claim back £25.00 (£125 x 20%), as the difference between your higher tax rate (40%) and the basic rate (20%) is 20%.
However, please note that Gift Aid does not apply to all donations. Monetary contributions given to a charity in exchange for goods or services such as charity cards or vouchers are not eligible for Gift Aid. Also, you cannot claim Gift Aid if your donation is a collection from others even if you are one of the contributors. Gift Aid is not available on donations from limited companies.
Last but not least, whether you give a company or personal donation, you need to keep records of every contribution if you want to claim tax relief.
For any questions, please do not hesitate to contact us.
