You can spend up to £150 per head (including VAT) every year on what HMRC calls ‘annual functions and events to entertain your employees’ – this could apply to both you and your spouse if you are both directors of your company (and if your spouse isn't a director you can still take them as a guest).
Provided you don’t go over the £150 limit, you can have any number of parties at any time throughout the year.
How is the £150 limit applied in practice?
Firstly you need to calculate the cost of the benefit.
You add up the cost of the party (room hire, food, entertainment, prizes and so on), along with the cost of transport for your employees and their guests, plus the cost of any accommodation (e.g. hotel) if relevant.
Then to work out the cost per head, simply divide the above total by the number of people (employees and their guests) who attend.So in the example above if it's you, your wife and two guests you divide by four.
Be careful, the £150 limit is not an allowance - so if the cost per head is £160, then the whole amount is taxable not just the £10 excess.
What happens if I have more than one staff party a year?
If you hold two parties, where the combined cost of both is over £150, then the £150 limit is offset against the most expensive one, leaving the other as a fully taxable benefit.
For example:
Summer barbecue - cost per head £65
Xmas party - cost per head £135
The Xmas party would be covered by the exemption, and you would be taxed on the £65 as a benefit in kind.
You should also be aware of the following:
1) The party has to be for all your staff, including non-family members (if relevant).
2) There is no tax relief if the party is just for directors and their families and other employees are excluded. Although if you’re the only director and employee you can still claim this allowance – see above
3) You can invite other guests, but the main purpose of the occasion must be for staff entertainment.
By the way, you can't claim this tax break if you're a sole trader or a partnership unless you have other employees.
So how do I treat the expense in my accounts?
Unlike client entertaining (see above) the cost of the staff Xmas party (or any staff annual function) is tax deductible. We’d recommend you show this expense separately in your accounts, as it is a staff benefit and therefore a cost of ‘staff welfare’ (or similar).
There really is no limit on the amount that the company can spend on an annual function as the whole cost will be an allowable deduction for the company. However bear in mind that if it's just you and your wife that are directors and the average cost per head appears to be excessive then this will be challenged by HMRC. Also remember that if the average cost is over £150 per head, you will be taxed on this as a benefit in kind.
HMRC will also disallow any staff entertaining costs if they perceive that they have been incurred in a way that is incidental to the usual costs of entertaining your customers, as opposed to a specific annual function for staff.
What about the VAT position?
You can claim all of the VAT on the cost of the function provided it is ‘staff welfare’ and not regarded by HMRC as entertaining. They will block any claims for input tax which they believe relate to client (and not staff) entertaining.
There may also be some restriction as to what input VAT you can claim depending on the number of non-employee guests brought along.
Finally, make sure you take care to calculate the cost per head of any events, as HMRC can impose penalties if they perceive you have been careless and there is any tax is due.
And remember, these tips are not a replacement for professional advice tailored to your precise needs and circ*mstances.
As an expert in taxation and accounting practices, I can confidently provide insights into the details mentioned in the article regarding HMRC's rules on annual functions and events for entertaining employees. My expertise is grounded in a comprehensive understanding of tax regulations and accounting principles, allowing me to break down the complexities for a clearer understanding.
Now, let's delve into the concepts outlined in the article:
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£150 Limit for Annual Functions:
- HMRC allows businesses to spend up to £150 per head (including VAT) annually on events to entertain employees.
- This limit applies individually, meaning both company directors and their spouses can benefit, and spouses can attend as guests even if not directors.
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Calculation of Costs:
- To determine the cost per head, one must add up all expenses related to the party, including room hire, food, entertainment, prizes, transportation, and accommodation.
- The total cost is then divided by the number of attendees (employees and their guests) to calculate the per-head cost.
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Taxable Amount and Excess:
- The £150 limit is not an allowance; exceeding it results in the entire amount being taxable.
- If the cost per head exceeds £150, the excess amount is fully taxable as a benefit in kind.
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Multiple Staff Parties:
- If there are multiple staff parties in a year, and the combined cost exceeds £150, the exemption is applied to the more expensive one.
- The other party becomes a fully taxable benefit.
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Conditions for Tax Relief:
- The party must be for all staff, and excluding non-family members may lead to disqualification.
- Sole traders and partnerships are ineligible for this tax break unless they have other employees.
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Treatment in Accounts:
- Unlike client entertaining expenses, the cost of staff parties is tax-deductible.
- It is advisable to separately categorize the expense in accounts as a staff benefit under "staff welfare" or a similar category.
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VAT Considerations:
- VAT on the cost of staff functions is claimable, provided it is considered 'staff welfare' by HMRC.
- Input VAT claims may face restrictions based on the number of non-employee guests.
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Careful Calculation and Penalties:
- HMRC can impose penalties if they perceive careless calculations, and accuracy in determining the cost per head is crucial.
- The article emphasizes the importance of professional advice tailored to specific circ*mstances.
In summary, understanding and adhering to HMRC's regulations regarding staff functions, expenses, and taxation are essential for businesses to ensure compliance and optimize financial practices.
