With Christmas party bookings already being made and summer balls around the corner, staff entertainment is an area of taxation that businesses should ensure they have a clear understanding of. We have outlined the tax rules around annual staff events and highlighted a few ways in which businesses can avoid being caught out.
At a glance, the rules surrounding staff parties appear to be fairly straightforward: if the function is an annual event, is open to all staff and costs up to £150 per head per year, there are no tax or National Insurance (NI) implications and nothing needs reporting to HMRC.
Where employers tend to slip up, however, is failing to interpret these rules strictly enough. The £150 figure is the limit per head per year, not per event. This means that even if the cost of a company’s annual event, or events, tips over this amount even marginally, the exemption will no longer apply and the total function costs will be a taxable employee perk. This is because the £150 is a limit, not an allowance.
Crucially, the £150 per head exemption must include VAT and account for all costs involved in enabling staff to attend the function, including transport and accommodation.
Other criteria are worth bearing in mind, too: the event in question must recur annually and all staff members must be invited. The total cost per head must be calculated by dividing between those who actually attend the annual events, as opposed to those invited.
Should the total cost of a business’ annual staff entertainment functions exceed £150 per head, the whole amount becomes a taxable benefit on the employee and must be reported by the employer on a P11D. The business will also have to pay Class 1A NI on the total sum.
Partner Annalise Lovett said: “The £150 exemption may seem easy enough to stick to, but the costs can quickly add up, especially when having to include VAT in the calculation.
“Slip-ups such as forgetting to account for the cost of taxis to and from an event, neglecting to factor in a hotel booking or failing to bear in mind the costs of a second annual function, can mean the £150 limit is unintentionally exceeded.
“We would advise all businesses getting ready to organise their annual staff party, awards ceremony or other entertainment event to bear these criteria in mind when calculating costs.”