Tax Questions: Is My Summer Staff Party Tax and NI Free?
Perhaps you are thinking of holding your first ever summer event for employees and need to factor into your decision the cost and related tax and NI.
What do HMRC’s rules say? Normally, business entertainment is non-tax-deductible. However, the cost of entertaining your employees including directors by having a staff party is an exception. Whether your business is a company or unincorporated, it’s entitled to a tax deduction for the cost of such an event.
By concession, HMRC allows unincorporated businesses a tax deduction for entertainment costs relating to the business’s owners where they are part of a larger cost relating to staff entertainment. For example, if the partners of a firm attend an entertainment event put on for their employees.
Other main factors affecting the tax position of staff entertainment are the benefit in kind rules. Normally, if you provide employees with a perk, this includes staff parties and the like, it’s a taxable benefit. But as you’re probably aware, a limited exemption applies. The main conditions of the exemption are:
- the party is an annual event
- all employees are invited (separate events can be held for different departments on different occasions)
- average costs (including transportation and other related expenses) of the event, per head for all employees and guests attending does not exceed £150 including VAT.
The first condition above requires the event to be annual. HMRC reasonably interprets this as “something that happens once a year on a recurring basis” . What HMRC means is that one-off events don’t qualify.
A belt-and-braces approach to ensuring the “annual” condition is met for the first time you hold, say, a summer picnic or BBQ, is to indicate in the invitation to staff that it’s hoped to make it an annual event. Alternatively, or in addition, record the intention in minutes of a meeting.
The exemption can apply even if the timing and nature of the annual event vary. The key point is that the event happens annually. For example, many businesses cancelled or deferred their 2020 and 2021 Christmas celebrations because of the pandemic. The cancellation for two years does not prevent the next Christmas party from qualifying as an annual event.
The entire cost of the business entertainment event is tax deductible from your business profits. Plus, it can qualify, subject to conditions, for the benefits in kind exemption if your intention is to repeat it annually, even if for unforeseen reasons it’s not possible to do so every year.
For help calculating your unique tax position, get in touch with LHP on Let’s Talk.