You’re thinking of holding your first ever summer event for your employees. You’re not sure what form it will take but one factor in your decision is the cost and therefore the tax and NI position. What do HMRC’s rules say about this?
Tax deductions
Normally, business entertainment is not a tax-deductible expense. However, the cost of entertaining your employees (including directors), for example by having a staff party, is an exception to this rule. Whether your business is run by a company or is unincorporated it’s entitled to a tax deduction for the cost of such an event.
Tip. By concession HMRC allows unincorporated businesses a tax deduction for entertainment costs relating to the business’s owners where they are part of a larger cost relating to staff entertainment. For example, if the partners of a firm attend an entertainment event put on for their employees.
Tax charges
The other main factors affecting the tax position of staff entertainment are the benefit in kind rules. Normally, if you provide employees with a perk, this includes staff parties and the like, it’s a taxable benefit. But as you’re probably aware, a limited exemption applies. The main conditions of the exemption are that:
- the party or similar is an “annual” event
- all employees are invited (but separate events can be held for different departments on different occasions)
- the average costs (including transportation and other related expenses) of the event, or events if there’s more than one in a tax year, per head for all employees and guests attending does not exceed £150 including VAT.
Trap. If the cost per head exceeds £150 the exemption cannot apply against any of it.
What’s an annual event?
The first condition above requires the event to be annual. HMRC reasonably interprets this as “something that happens once a year on a recurring basis” . This could be read as meaning that only when a pattern of an annual recurrence is established can the exemption apply but this isn’t what HMRC is saying. An intention to hold an event annually will meet the first condition. What HMRC means is that one-off events don’t qualify. On this point its internal guidance says “it follows from this that a one-off event, for example a party to celebrate a 25th anniversary, cannot be an annual party or function”.
Tip. A belt-and-braces approach to ensuring the “annual” condition is met for the first time you hold, say, a summer picnic or BBQ, is to indicate in the invitation to staff that it’s hoped to make it an annual event. Alternatively, or in addition, record the intention in the minutes of a meeting of the directors, partners, etc.
Tip. The exemption can apply even if the timing and nature of the annual event vary. The key point is that the event happens annually. For example, many businesses cancelled or deferred their 2020 and 2021 Christmas celebrations because of the pandemic. The cancellation for two years does not prevent the next Christmas party from qualifying as an “annual event”.
The entire cost of the business entertainment event is tax deductible from your business profits. Plus, it can qualify, subject to conditions, for the benefits in kind exemption if your intention is to repeat it annually, even if for unforeseen reasons it’s not possible to do so every year.
The next step
EIM21690 – Particular benefits
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.