Staff parties and annual functions - www.rossmartin.co.uk

Are staff parties and annual functions tax-exempt? Are there any limits on the cost? What happens if the cost limit is exceeded? What if there is more than one event per year? How are company away days treated for tax purposes?

This is a freeview 'At a glance' guide to staff parties and annual functions.

At a glance

Staff parties: at a glance

A staff party or an annual function qualifies as a tax-free benefit for your employees providing that you meet the following conditions:

The total cost must not exceed £150 per head, per year.
£150 includes VAT together with any extra costs such as transport and accommodation.
The £150 is a limit and not an allowance: if the cost is £151, the whole benefit is taxable.
The event must be primarily for entertaining staff.
The event must be open to all staff (in that location, if you have several branches or departments).
The event must not just be for directors unless all your staff are directors.
The cost of the whole event is an allowable expense for your business.
You can claim back input VAT but this may be restricted where you are also entertaining customers.

Overview & FAQs

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

Provided the £150 limit is not exceeded, there can be any number of parties, for instance, three 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 any accommodation provided.
To work out the cost per head, divide the total by the number of persons (staff and any other guests) attending the function. If you have a large function it may be impossible to count up exact numbers of those who physically attend (particularly if people come and go at different times). If it is impossible to work out actual attendees then you will have to estimate numbers according to what was budgeted or booked. Bookings are normally made on a 'per head basis'.

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 (BIK) 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 BIK.

Qualifying conditions

The party has to be for all staff, or if you have divisions or sections you may hold a party for that division or section, separate from the other ones.
There is no tax relief if an event is 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)).
Other guests may be invited too, but the primary purpose of the event must be that of entertainment for all staff.

Virtual Parties

In light of the social distancing restrictions imposed by Covid-19, many staff parties were being held online.

Virtual parties, where staff joined using video conferencing or some other IT software, were added to HMRC's guidance regarding annual functions qualifying for a tax exemption.

If the party was held using IT and meets all of the other conditions, then it will be exempt.

Company away days

To determine the employment tax treatment of ‘company away days’ requires careful analysis of the event, its agenda, and rationale.

The starting point is that Staff entertainment is generally taxable as a BIK. HMRC are starting to scrutinise company away days more closely, especially where there is a large social or fun element.

At one end of the spectrum, employees may be required to attend a venue, which is not their normal place of work, for the purposes of a business update, planning, or strategy meeting (or similar).

In such cases, any reimbursed travel expenses may be non-taxable under the Travel rules, for example, where the employee’s attendance is necessary in the performance of the duties of their employment, and the location is a temporary workplace.
This treatment may also extend to Subsistence and Accommodation costs incurred in connection with such qualifying business travel.
- It is necessary to consider whether the costs of subsistence are reasonable.
- An evening meal and drinks together may be exempt, but drinks in isolation (perhaps later in an evening) are more likely to amount to taxable entertaining rather than non-taxable subsistence.

A key point to examine with events is whether there is an element of employee entertainment, and its quantum. This becomes more important where, for example, additional activities are put on around business meetings.

There will be no exemption for company away days unless it can be proved that the majority of the time away was spent discussing business issues, with the entertainment element incidental to the whole event.
Entertainment which is provided as a form of reward to an employee at an event is likely to be taxable.

Employers should keep records of events, including agendas, attendees and reasons for attendance.

If it is determined that the company away day is taxable, but it only takes place once a year, the event could fall under the annual events exemption.

Some 'away day' events may fall within the exemption for Work-related training.

The exemption under s.250 ITEPA 2003 refers to "work-related training or any benefit incidental to such training".
S.251 explains the meaning of work-related training as:
- A training course or other activity designed to impart, instil, improve, or reinforce any knowledge, skills, or personal qualities which either:
  1. Are likely to prove useful to the employee when performing the duties of the employment.
  2. Will qualify or better qualify the employee to either perform those duties, or participate in any charitable or voluntary activities that are available to be performed in association with the employment.

Team building activities and the training exemption:

HMRC acknowledge that "a wide range of practical and/or theoretical skills will qualify for exemption so long as the skills are relevant to the employee. Where leadership and team skills are appropriate, participation in activities such as Outward Bound, Raleigh International, or Prince's Trust will qualify."
- It is notable that HMRC refer to recognised schemes as opposed to team building events that employers design for themselves.
Whilst team building activities may encourage teamwork and collaboration, HMRC expect structured training with defined learning objectives and outcomes for the activity to qualify for exemption under s.250.
Travel and accommodation costs can be exempt under the training exemption, as can meals directly associated with the business training elements (although if there is a clear social element, these costs will be a taxable benefit).
Expenditure may be incurred for a mixed purpose, intended in part to reward and in part for genuine training.
- This can be apportioned where appropriate.
- Apportionment will not be necessary simply because an element of genuine training is enjoyable or recreational.
- For example, use of a hotel's swimming pool and leisure facilities during a residential course will not require apportionment.

When planning company away days, employers should:

Set a clear agenda with defined learning objectives where training is anticipated.
Provide structured sessions linked to employees' roles.
Minimise purely social or lavish elements.
Document outcomes, e.g. by using feedback forms.

Where taxable benefits on away days and similar events do arise, employers could consider whether to include them in a PAYE Settlement Agreement.

Tax treatment for employer

The cost of the staff Christmas party (or any staff annual function) is tax-deductible in the employer's accounts. Section 46 ITTOIA 2005 gives a let-out clause which means that entertaining staff is not treated for tax in the same way as customer entertaining.
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 for tax 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 to save having to file a lot more P11Ds (you then pay your employees’ tax and National Insurance Contributions (NICs)). See PAYE Settlement Agreements.

VAT and annual functions

Input VAT is fully reclaimable on the cost of the function (as it is 'staff welfare' and not regarded by HMRC as entertaining) unless you are an owner-manager and having a one-person party, or if the function is mainly for directors (and so excludes other staff). In these circumstances, HMRC will block claims for input tax.
If you are also entertaining UK clients as well as staff, you have to disallow a proportion of input VAT (based on the number of clients v staff).
If the event is to entertain UK customers and your staff are there to look after the customers, the whole event is regarded as 'entertaining'; you are blocked from any reclaim of input tax.
If the event also serves to entertain overseas customers then it may be possible to reclaim input VAT. You should read HMRC Business Brief 44/10 first.

Record keeping

An employer must take reasonable care to calculate the annual cost per head of events. When a failure to take reasonable care leads to a loss of tax, Tax penalties will apply. It is recommended to keep sufficient records to prove to HMRC, if required to do so, the numbers attending any event so that the cost per head can be calculated.

Small print & links