It is that time of year again for staff parties and annual functions, so it is important to make sure you record it properly. 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 3 parties at a cost of £50 each – at various times of the year.
Staff parties
A staff party or an annual function qualifies as a tax-free benefit for your employees providing that you meet the following conditions:
The total cost must not exceed £150 per head, per year.
£150 includes VAT together with any extra costs such as transport and accommodation. The £150 is a limit and not an allowance: if the cost is £151, the whole benefit is taxable.
The event must be primarily for entertaining staff.
The event must be open to all staff (in that location, if you have several branches or departments).
The event is not just to be for directors, unless all your staff are directors.
The cost of the whole event is an allowable expense for your business.
You can claim back input VAT but this may be restricted where you are also entertaining customers.
Tax treatment for employer
The cost of the staff Christmas party (or any staff annual function) is tax deductible in the employer’s accounts.
Show this expense separately in the accounts as it is a staff benefit and therefore a cost of “staff welfare” (or similar).
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 in the employer’s accounts, 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 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)
VAT and annual functions
1. Input VAT is fully reclaimable on the cost of the function (as it is “staff welfare” and not regarded by HMRC as entertaining),
unless you are an owner-manager and having a one-man party, or if the function is mainly for directors (and so excluding other
staff). In these circumstances HMRC will block claims for input tax.
2. If you are also entertaining UK clients as well as staff, you have to disallow a proportion of input VAT (based on the numbers of clients v staff).
3. If the event is to entertain UK customers and your staff are there to look after the customers, the whole event is regarded as
“entertaining”; you are blocked from any reclaim of input tax.
4. If the event also serves to entertain overseas customers then is may be possible to reclaim input VAT, however you should read
HMRC Business Brief 44/10 first.
Need more information?
If you need anymore support on how to record your staff parties and annual functions properly, please do not hesitate to contact our dedicated team of chartered accountants. We offer a wide range of services which are unique to your business. Our team of chartered accountants have a wealth of experience in a broad range of sectors, from construction and property to the charity sector. Our team work hard to ensure they create smart and effective tax-efficient solutions for start-ups to optimise growth and help them succeed. Please do not hesitate to contact us today. For more information please do hesitate to contact us on 0161 962 1855. Alternatively you can email us using the form below and we will contact you as soon as possible.
Our fantastic team at A&C Chartered Accountants are here to help.
