‘Tis the season to be jolly? How to party tax-efficiently
Updated: Jan 22
Treat your staff to a tax-free virtual Christmas party !
If you hold a virtual social event for your staff this year instead of a real party, then the usual annual staff function tax exemption of £150 per person applies, so long as the usual rules are met (explained below).
🎉 .......So party on….(virtually).....
Staff parties: what are the rules?
A staff party or event is a tax-free benefit for the employees that attend, so long as the following conditions are met:
The total cost including VAT, food, refreshments, entertainment, room hire, transport & accommodation (if provided), doesn’t go over £150 per person per year
It’s annual, such as a Christmas party or summer barbecue
It’s open to all employees (guests can be invited, but the main purpose of the occasion must be for staff entertainment/welfare)
Each employee can invite a guest and the £150 exemption applies to their costs too.
What are the rules for virtual events?
If it's an annual function held virtually with the use of IT, then the same £150 exemption applies, so long as the the conditions above are met. HMRC specifically say that it's OK to provide employees with a hamper of food and drink to be enjoyed during the virtual party, so long as all employees are invited and you don't go over the £150 per person per year limit.
Who can benefit from this tax for staff functions?
✅ Directors and employees, so long as HMRC’s conditions are met. This includes single person Ltd companies.
❎ If you're a sole trader or a partnership, sorry you can't use this tax exemption because technically you are not an employee. You can however claim it for any employees on your payroll.
What do you need to report to HMRC?
If you meet the rules, then you and your employees won’t have to report anything to HMRC or pay tax or National Insurance on the benefit.
What happens if costs are more than £150 per person?
The cost of entertaining staff and their partners is an allowable deduction for corporation tax purposes, so even if you spend over £150 per person, the whole cost is a deductible expense for the business, (although if you’re the only director, or a husband/spouse team then HMRC will not be happy if your staff entertainment expenses are excessive).
If you go over the £150 limit:
The whole cost is classed as a benefit in kind, not just the amount over £150;
You will need to record the whole cost per person as a benefit-in-kind on each employee’s P11D form;
There may be an income tax implication for the employees concerned;
The company will be liable for Class 1A National Insurance on the full cost;
If you hold several events and the combined cost is over £150 per person, then the £150 exemption is offset against the most expensive event, leaving the other event(s) liable.
What about combined customer and staff parties?
Business entertaining is specifically disallowed for corporation tax purposes. HMRC will disallow any employee entertaining costs if they are incidental to the cost of entertaining your customers.
If, for instance, your employees are at the event primarily to look after your customers then the whole expense will be disallowed for corporation tax purposes and the £150 a head limit will not be allowed because the event is a customer hospitality event and not a staff welfare event.
If however, the event is primarily for your staff, then you record the employee proportion of the cost as an expense, and the £150 tax relief can be applied to the staff that attend.
Can you claim back the VAT on staff parties?
Yes if it’s an event just for employees, and it meets that HMRC rules outlined above.
Partly if it’s an employee welfare event but non-employee guests have been invited - you can only claim a proportion of the VAT for the employees that attend.
Partly if it’s an employee welfare event but some customers have been invited - you can only claim a proportion of the VAT for the employees that attend.
No if only directors and their partners attend and other employees are not invited - because HMRC do not class this as a business event.
No if it’s a customer hospitality event rather than an employee welfare event (you cannot claim back VAT on customer hospitality unless the customers are from overseas).
Make sure you calculate the cost per head carefully and keep records of costs and attendees because you may be liable to penalties if HMRC decide that there is a tax liability. In your accounts, it’s sensible to record these costs in a separate expense account.
If in doubt, seek professional advice 😉
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