If you provide entertainment benefits to your employees, your company may be taxed on the value of such perks.
Your company will also need to report the value of such benefits on each employee’s annual P11D (benefits in kind) form.
However, there is one exception to this rule that you may not know about.
HMRC’s £150/head staff party concession
Your company may be able to benefit from HMRC’s £150 per head tax-free annual event exemption if you organise an event or function for your employees.
The exemption applies to any type of annual function – such as a Christmas party or summer barbeque.
If your company’s expenditure meets several conditions, it doesn’t need to report the event to HMRC or pay any Class 1A NICs. The entire cost can be offset against the company’s Corporation Tax bill.
The main conditions are:
- The primary function of the event must be to entertain members of staff.
- The total cost of entertaining staff must not exceed £150 per head, per year (including VAT).
- The cost must include all expenses relating to the event(s) including transport and accommodation.
- The event must be open to all employees – not just directors (unless all staff are directors).
- If your company is based across separate departments or locations, you can hold separate functions under the same rules.
What if the event exceeds the £150/head threshold?
If the social event (or the total annual cost of events) exceeds £150 per head – even by just £1, then the cost is not tax-deductible.
So, if the combined cost per employee – including VAT – is £160 or even £151 – the exemption does not apply!
In this case, the company must pay Class 1A National Insurance on the total sum of the event costs.
The costs must be reported in full to HMRC so that National Insurance payments can be calculated and paid accordingly.
Employees also pay extra income tax on the value of any ‘benefits in kind’ reported on their P11D.
What about multiple events?
It is worth noting that the £150 per head exemption applies per employee per year, not per event.
The exemption can therefore be split across multiple functions, as long as each separate event meets the other eligibility criteria.
If the company holds 2 parties, costing under £150 (including VAT) per employee, the combined cost of both parties falls under the exemption.
However, if you have two parties – one costing £120 per employee, the other costing £50 per employee, the most expensive one is exempt.
In this example, the £50 employee is treated as a benefit in kind – and reported on each employee’s P11D.
Virtual functions included post-pandemic
As we all know, the way many businesses work changed forever as a result of COVID.
Virtual events are now commonplace, rather than the exception to the norm.
As a result, HMRC added the following clarification in its technical guidance.
Where an annual function is provided virtually using IT then the exemption is capable of being met provided all other conditions are also satisfied…
Things employers should be aware of
- When you calculate the cost per head of a party or event, factor in all costs accrued to enable their employees to attend the function, including transport and accommodation.
- The total cost per head must also be inclusive of VAT.
- Divide the total cost by the number of employees who attend, not the number who were invited, to arrive at the cost per head.
- The £150/head limit is an exemption, not an ‘allowance’. You can only claim for the costs of staff entertainment against your Corporation Tax bill if they are genuine business costs.
- Keep accurate records of any expenditure, and ensure that any bills or receipts are in your company name.
You can read HMRC’s technical guidance in EIM21690.
Read more in our guide to limited company expenses.
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