Entertaining For Your Business
The cost of entertaining employees to keep up morale or as a reward for good work is staff entertainment. Entertainment of staff is allowable for tax relief on which you can reclaim any VAT you pay. The HMRC gives a tax guide that looks at how to treat tax of annual functions/parties like Christmas events and other social functions for employees looking at it from the employer’s perspective. The tax guides follow a general rule in that the party is not a benefit to the company so long as it is an annual event and open to all staff and other guests such as their family members. The cost of the yearly event from start to finish in a given tax year should not surpass £150 (inclusive of VAT, accommodation, food & drinks and transportation) per head. If the employer holds more than one annual event, the £150 per head is not per function but is for the tax year. If employees are acting as hosts to a group of customers at an event, then these counts as business entertainment. There is no VAT deduction or tax relief of any expenses of such an event. HMRC provides the favorable tax treatment provided some specific conditions are met. Outside this particular exception, staff entertaining is considered a kind benefit, and both employers and employees are subject to taxes on the value of benefits.
What Is The Staff Entertaining?
HMRC defines entertaining as subsidized hospitality or providing for free. Some of the examples of what they count as entertaining include free samples, business gifts, food & drinks, transportation and accommodation. Other may involve payments to third party entertainment organizers, sporting events and facilities, use of capital assets such as car hire service, aircraft, entry to clubs or nightclubs, theatre and concert tickets. A staff party qualifies for the tax-free benefit as long as it meets the following conditions:
- The total cost does not exceed £150 per head per tax year.
- All the expenditures of the event are for the business.
- The function is primarily for entertaining staff.
- The treat is not just being for directors unless all teams are directors.
- The £150 is not an allowance but a limit. When the expenses rise to £151, the full benefit is taxable.
- The event must be for all the staff in that branch/location.
- £150 is inclusive of VAT and other expenditures such as accommodation, food & drinks and transportation.
- VAT claim may be restricted in events where customers are entertained.
How Does The £150 Per Person Exemption Work?
Company directors are entitled to provide an annual event for themselves, their employees, and their business partners and recover the costs against the company provided the value does not exceed £150 inclusive of VAT, accommodation, food & drinks and transportation per head. The expense should not exceed even by a penny, and the event should be open to all the company staff. The directors may decide to hold several events throughout the year, but the overall total claim should not exceed this threshold. Importantly also, you must hold an event to reclaim the costs, so you can’t only make a cash claim. To calculate the value, HMRC states that you should divide the total cost and the number of people, including guests who attend to generate the cost per head. Provided an employer does not exceed the threshold limit can hold any number of parties at any time of the tax year.
Tax Treatment For An Employer
The tax cost of staff entertaining is deductible in the employer’s accounts. The company accounting must show these expenses separately in the reports as a staff benefit; therefore, the cost of staff welfare. There is no set limit on what an employer can payout on a staff welfare function. The only cost that can be disallowed is if it is found that staff entertaining is incidental to that of entertaining customers. A VAT can be fully reclaimed on the event cost, but if you are entertaining both clients and staff, you have to base your accounting for input VAT on the number of clients versus staff. If the whole event is to treat clients while your team is looking for customers, then the function is regarded as entertaining. In such cases, the employer is blocked from reclaiming the input tax. For annual events costing less than £150 expense rules, click here (HMRC).