Nichola Ross Martin's Tax Consultancy

At a glance

Staff parties: at a glance

You can lay on staff parties and annual functions as a tax-free benefit for your employees.

• The total cost must not exceed £150 per head.
• Cost includes VAT, transport and accommodation.
• £150 is not an allowance, so if the cost is £151, the whole benefit is taxable.
• The event must be primarily for entertaining staff.
• The event cannot be solely for directors.
• The cost is an allowable expense for your business.
• You can claim back input VAT but only a proportion if the event is also to entertain customers.

Business gifts: at a glance

• A gift to an employee is not taxed as a benefit providing it is trivial.
• The cost is deductible in your accounts.
• You can reclaim VAT on the cost.

Overview and FAQs

An employer may spend up to £150 per head (inclusive of VAT) in providing annual functions and events to entertain his staff.

Providing the total is not exceeded, there can be any number of parties, for instance 3 parties at a cost of £50 each – at various times of the year.

For example:

To calculate the cost of the benefit

Add together the cost of the party or function (room hire, food, entertainment, prizes etc), the costs of transporting staff and their guests, together with the cost of accommodation also provided.

Divide the total by the number of persons (staff and any other guests expected to attend the function (not the number of actual attendees). As you will have normally catered on a cost per head basis, you can use that figure.

The £150 is not an allowance and so if the cost per head works out at £152, then £152 is taxable as a benefit in kind and goes on your employees’ P11d, not £2.

More than one party?
If there are two parties, for instance, 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.

For example:

Summer party - cost per head £75

Christmas ball - cost per head £110

The ball would be covered by the exemption, and the employees taxed on the £75, as a benefit in kind.

Qualifying conditions

1. The party has to be for all the staff, or if you have divisions or sections you may hold a party for that division or section, separate from the other ones.
2. Parties cannot be solely for directors and their families (unless you are the owner-manager, or a family company and you happen to be the only employee(s)).
3. Other guests may be invited too, but the primary purpose of the event must be that of entertainment for all the staff.

Tax treatment for employer

The cost of the staff Christmas party (or any staff party) is wholly and exclusively for the purposes of the business (section 46 ITTOIA 2005 gives a let-out clause which means that entertaining staff is not treated in the same way as other forms of entertaining are for tax). Show this expense separately in the accounts as it is a staff benefit and therefore a cost of “staff welfare” (or similar).

There is no monetary limit on the amount that an employer can spend on an annual function. A party costing more than £150 per head will be an allowable deduction in the employer’s accounts, as the employees would pay tax on a benefit at this level so it is just another form of earnings. 

The full cost will be disallowed in your accounts if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.

Parties covered by the £150 exemption do not have to be reported on form P11Ds. If you do exceed the limit, and have created a taxable benefit in kind, you might consider settling it using a PAYE settlement agreement (you then pay your employees’ tax and NICs).

VAT and annual functions

1. Input VAT is fully reclaimable on the cost of the function (as it is on staff welfare), unless you are an owner-manager and having a one-man party, or if the function is mainly for directors (and so excluding other staff). In these circumstances HM Revenue & Customs (HMRC) will not allow you to reclaim the input tax.
2. If you are also entertaining clients, you need to disallow a proportion of input VAT (based on the numbers of clients v staff).

Christmas presents and other gifts

“Trivial Gifts”

Christmas is a time for giving, and HMRC treat the following seasonal gifts as “trivial” benefits of staff welfare, and will not seek to tax them as employment income or rewards for past services:

1. A turkey (but not a hamper)
2. A box of chocolates (no upper limit is given, but it is in the singular form!)
3. A bottle of ordinary wine or two (but not a case)

Items such as tea, coffee and cold drinks provided in the workplace, together with gifts of flowers on anniversaries or special events, are also tax-free trivial benefits.

There is no monetary limit to determine a trivial benefit. HMRC’s officers are told to “strike a balance between sensible practical administration of the tax system and the need to deter employers from providing what is in reality part of the remuneration of their employees in a form that seeks to exploit that practical administration” (extract from EIM21860). Whether something is trivial or not, however, is a question of judgement.

If in doubt remind HMRC officers that they do need to be sensible, a bottle of “ordinary” wine has no real meaning, unless one supposes that it is any wine other than an “extraordinary” or vintage!

Essential know-how:

Combining gifts with the annual party

If you provide your employees with gifts at the annual party or function, the cost of the gifts could be added to the cost of the function by an over-zealous tax inspector. If you do not want to combine the two, make sure that you give out the gifts before or after the event, as the cost of the gifts could take you over the £150 per head limit. This also avoids having to have the argument about what is a trivial gift, and what is the cost of a party.

Tax treatment for employer

Treat trivial gifts as staff welfare in the accounts, it is fully tax deductible.

VAT and trivial benefits

Input VAT is reclaimable by the employer on the cost of trivial benefits.

Tax-trap: If input VAT is reclaimed by a one-man owner-manager or for the cost of an event open only to the directors (so other staff are excluded), HMRC will not allow a VAT recovery on the grounds that the motive behind incurring the cost was a personal one. It is extraordinarily difficult to try and disprove that this is not actually the case.

Other gifts to staff

A gift that is not trivial is taxable as an employee’s earnings on the money’s worth principle. This will apply to any type of gift. Gifts of shares and securities (which include debts and IOUs) are taxed under the employment-related securities rules.

You can provide gifts to staff on a personal basis, but the implication will be that this is an employment reward if a PAYE inspector discovers the gift. If you do want to tax gifts to the employees the easiest way to approach the problem is to ensure that this is a private matter. You buy the gift and give it to the employee.

If you must put a gift through the business then you can settle the tax and NICs by PAYE settlement agreement.

Small print and links

Section 264 ITEPA 2003 covers annual parties and functions.

"Trivial benefits" are not found in primary tax legislation (e.g. ITEPA 2003) as they have been included in the tax rules by Statutory Instrument.

The basic legislation, which says that the cash equivalent of a benefit is treated as earnings, is found in section 203.

HMRC manuals:
Annual parties and functions: EIM21835

Concession for trivial benefits and gifts: EIM21860