Annual Staff Parties
There is a tax exemption for employee entertaining but only under certain conditions. The exemption only applies to annual parties that are available to all staff and is set at £150 per head inclusive of VAT.
If the cost of the party goes over £150 per head then unfortunately all the costs (not just those in excess of £150) are taxable as a benefit in kind. It is important to include the whole cost of the event from start to finish, including taxis home and overnight accommodation.
If the limit is exceeded the entire benefit must be reported on each employee’s P11D, or alternatively, the grossed up tax can be paid by the employer through a PAYE settlement agreement (PSA).
It's important to note that the amount of £150 per head applies to all those attending the function not just employees. Other guests, such as family members, may be invited too, but the primary purpose of the event must be that of entertainment for all the staff.
A company holds an annual Christmas party for all its staff. The average cost per employee is £50. This is exempt under the trivial benefit rules (see our staff entertainment guide).
In addition the directors hold an annual party at Christmas for its directors at which the cost per head is £75. This function is not open to staff other than directors. Consequently it is not covered by the exemption because it is not available to staff generally. The full benefit is chargeable on directors attending.
A company holds two annual dinner dances open to all its employees in the tax year. The total cost of the first, including transport and accommodation provided for certain guests, was £10,000 including VAT. The total number of persons attending was 100 and the cost per head was therefore £100.
The second dinner dance cost £8,000 including VAT, and 100 people attended this. The average cost was therefore £80.
The total cost per head for both functions was £180 so they cannot both qualify for exemption. Since the cost per head of each party on its own was not more than £150, either event can qualify for exemption on its own but it is more beneficial overall for the first to be exempted. So the benefits arising from that function will not be charged and those arising from the second function will be charged.
For employees who attended:
- both events, they will be chargeable only on the benefit of £80 for the second event
- only the first event, there will be no chargeable benefit because that event is exempt
- only the second event, they will be chargeable on the benefit of £80.
If the average cost per head of each of the functions exceeded £150 the full amount of the benefit of both functions would be chargeable. The £150 is not an allowance to be set against an amount that exceeds that figure.