Sarah Laing reminds employers that a statutory exemption should allow them to meet the cost of certain staff social events without triggering a liability to tax or NICs
Although there is no specific allowance for a ‘Christmas party’ or ‘summer barbecue’ HMRC does allow limited tax relief against the cost of holding an ‘annual event’ for employees, providing certain conditions are met (ITEPA 2003, s 264).
A staff event will qualify as a tax-free benefit if the following conditions are satisfied:
- the total cost must not exceed £150 per head, per tax year;
- the event must be primarily for entertaining staff;
- the event must be open to employees generally, or to those at a particular location if the employer has numerous branches or departments.
The ‘cost per head’ of an event is the total cost (including VAT) of providing:
a) the event, and
b) any transport or accommodation incidentally provided for persons attending it (whether or not they are the employer's employees),
divided by the number of those persons.
Provided the £150 limit is not exceeded, any number of parties or events may be held during the tax year, for example, there could be three parties held at various times, each costing £50 per head.
The £150 is a limit, not an allowance - if the limit is exceeded by just £1, the whole amount must be reported to HMRC.
If there are two parties, for example, 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.
Employer treatment
The cost of staff events is tax deductible for the business. The legislation provides a let-out clause, which means that entertaining staff is not treated for tax in the same way as customer entertaining. The expenses should, however, be shown separately in the business accounts.
Whilst there is no monetary limit on the amount that employers can spend on an annual function, if a staff party costs more than £150 per head, the employees will have a liability to pay tax and National Insurance contributions (NICs) arising on the benefit-in-kind.
The employer may agree to settle any tax charge arising on behalf of the employees. This may be done using an HMRC PAYE settlement agreement (PSA), which means that the benefits do not need to be taxed under PAYE or included on the employees’ forms P11D. The employer’s tax liability under the PSA must be paid to HMRC by 19 October following the end of the tax year to which the payment relates.
It should also be noted that whilst the £150 exemption is mirrored for Class 1 NICs purposes, (so that if the limit is not exceeded, no liability arises for the employees), Class 1B NICs at the current rate of 13.8% will be payable by the employer on benefits-in-kind which are subject to a PSA.
Disallowed costs
The full cost of staff parties and/or events will be disallowed for tax purposes if it is found that the entertainment of staff is, in fact, incidental to that of entertaining customers.
VAT
The VAT element on the event expenses cannot be reclaimed if only directors and/or their partners attend the event. However, the input VAT may be reclaimed if directors and partners attend a staff party alongside other employees.
Practical tip
The legislation refers to ‘an annual party or similar annual function’. Although HMRC does not seem to interpret this to mean that the same event must be held every year, it may be prudent to check the issue in advance where a one-off event is planned.
