Yes, a staff party can be completely tax free for employees, provided it is open to all your employees, or all employees at one location, and the total cost per head of your annual functions in the tax year is £150 or less, including VAT.
The £150 is a limit, not an allowance. If the cost per head comes to £151, the whole amount becomes taxable, not just the extra £1.
The conditions
- Open to all. The event must be available to all employees, or to all employees at a particular site. A party for directors and senior managers only does not qualify.
- Annual. It must be an annual event, such as a Christmas party or summer barbecue, not a one-off celebration.
- £150 per head. The total cost of all qualifying events in the tax year, divided by the number of people attending, must not exceed £150.
What counts towards the £150
Include everything the business pays for the event, including VAT:
- venue hire, food and drink
- entertainment, such as a band or DJ
- transport to and from the venue, such as taxis or a coach
- overnight accommodation if you provide it
To find the cost per head, divide the total cost by the total number of people who attend, including partners and other guests. An employee who brings a guest is treated as receiving the benefit of both places.
A worked example
A company has 20 employees. Each brings a partner to the Christmas party, so 40 people attend. The total cost, including VAT and taxis home, is £4,800. That is £120 a head.
In the summer, the company holds a barbecue for the same 40 people at a cost of £1,200, which is £30 a head. Together the two events cost £150 a head, so both are exempt. There is nothing to report and no tax for anyone.
If the barbecue had cost £1,240, or £31 a head, the combined total would be £151. Where there is more than one event, the exemption can be applied to whichever events fit within £150, so the Christmas party would stay exempt and the barbecue would become taxable. Had the Christmas party alone come to £151 a head, all of it would be taxable.
If you go over
A taxable party is a benefit in kind for each employee who attended. Asking staff to pay tax on a party is rarely welcome, so most employers use a PAYE Settlement Agreement. The business pays the tax and National Insurance on the employees' behalf, grossed up, and the payment is due by 22 October after the end of the tax year.
That can make an over-budget party considerably more expensive, which is why it is worth checking the figures before booking extras.
Corporation tax and VAT
The cost of entertaining staff is deductible for corporation tax, whether or not the party is within the £150 exemption. Entertaining clients and other business contacts is never deductible. If clients or suppliers attend your staff party, the part of the cost relating to them should be disallowed.
VAT on staff entertaining can generally be reclaimed. VAT relating to non-employees, such as clients, cannot.
Directors and small companies
The exemption is not limited to large employers. A small company can hold a qualifying party, as long as it is open to all employees and stays within the limit. Keep a note of who attended and the full cost, as HMRC may ask, particularly where the attendees are mainly directors and their families.
Other small gifts to staff, such as a bottle of wine at Christmas, may fall under the separate trivial benefits rule for items costing £50 or less.
What to do
- Set a budget per head for the year before planning any events, including VAT, transport and accommodation.
- Invite all employees, or all employees at a site.
- Keep invoices and an attendance list for each event.
- Check the combined cost per head before booking a second event in the same tax year.
- If you expect to exceed £150, budget for a PAYE Settlement Agreement.
If you would like us to check whether your events qualify, book a free call.
