An employer may spend up to £150 per head (inclusive of VAT) per year, in providing annual functions and events to entertain its staff. Provided the £150 limit is not exceeded, there can be any number of parties, for instance 5 parties at a cost of £30 each, at various times of the year.
To calculate the cost of the benefit:
Add together the cost of the party or function (room hire, food, entertainment, lottery prizes etc), as well as any transport or overnight accommodation provided to obtain the total cost of the event. Next you need to calculate the cost per head, by dividing the total by the number of persons (staff and any other guests) attending the function.
The £150 is not an allowance and so if the cost per head works out at £152, then £152 is taxable as a benefit in kind and goes on your employees’ P11d, not the £2.
If there are two parties, for instance, where the combined cost of each exceeds £150, the £150 limit is offset against the most expensive one, leaving the other one as a fully taxable benefit.
For example a company organised two events in 2019:
Summer BBQ - cost per head £ 65
Christmas Party - cost per head £120
The Christmas Party would be fully covered by the exemption, and the employees will be taxed on the £65, as a benefit in kind.
HMRC also impose the following three conditions on staff parties/events:
1. The party has to be for all the staff, or if you have separate offices or divisions you may hold a party for that office or division separate from the other ones.
2. There is no tax relief if an event is solely for directors and their families
3. Other guests may be invited too, but the primary purpose of the event must be that of entertainment for all the staff.
Non-employees such as contractors or sub-contractors do not receive any taxable benefit from their attendance as such a function.
This equally applies to clients and prospective clients.
The cost of the staff Christmas party (or any staff annual function) is tax deductible for corporation tax. S 46 ITTOIA 2005 provides that entertaining staff is not treated for tax in the same way as client entertaining.
There is no monetary limit on the amount that an employer can spend on an annual function. A party costing more than £150 per head will be an allowable deduction for corporation tax as the employees would pay tax on a benefit at this level so it is just another form of earnings.
The full cost will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.
Parties covered by the £150 exemption do not have to be reported on form P11Ds. If the amount has been exceeded (see above), then a P11D will need to be completed. If you do exceed the limit, and have created a taxable benefit in kind, you might consider settling it using a PAYE settlement agreement (you then pay your employees’ tax and NICs)
However, there is no tax relief on the cost of entertaining anyone who isn't an employee or the guest of an employee. Therefore, no P11D or other reporting is required.
If there is a mixed group of people at the party (some employees, some employees' partners, and some contractors/subcontractors), the cost of entertaining the subcontractors goes to business entertaining (not tax deductible), and the cost of entertaining the employees and their guests goes to staff entertaining (tax deductible)
VAT is fully reclaimable on the full cost of the function (as it is "staff welfare" and not regarded by HMRC as entertaining), unless the function is mainly for directors (so excluding other staff).
If you are also entertaining UK contractors/sub-contractors /clients as well as staff, you have to disallow a proportion of input VAT (based on the numbers of these v staff). If the contractors/sub-contractors /clients are non –UK residents, then generally no disallowance need be made.
We hope you found this article helpful, but it should be noted that there are many pitfalls to be aware of and we would be more than happy to help you with completion and submission of P11D declarations, PAYE settlement agreements and Tax implication of staff entertainment. Our expert team is available to provide you with advise and can be contacted on 01273 326 556 or you can drop us an email at firstname.lastname@example.org .
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