Tax Rules for Annual Staff Parties

Contents

Introduction

With Christmas fast approaching, we thought it would be useful to remind everyone of the rules around annual staff parties.

Usually, when providing social entertainment for employees, the cost of such entertainment will trigger a tax liability on their share of the cost. This cost usually needs to be declared via payroll on the employees P11D.

However, there is an exception to this, which is in the form of an exemption for the annual staff party.

What are the conditions for annual staff party exemption?

For the annual social event to qualify as exempt, it must meet the following three conditions:

  • An annual event
  • Open to all employees
  • Costs £150 or less per head (including guests)

How much can be claimed per employee?

The exempt amount for the annual staff party is up to £150 per head.

The cost per head can include all expenses associated with the party, including transport, food, drink, incidental accommodation and any other similar costs.

To calculate the cost per head, the total costs should be added up and then divided by the total number of attendees (employees plus guests attending).

What if the total cost of the party is > £150 per head?

Unfortunately, the exemption is not an allowance, so if you go beyond £150 per head, the total cost is no longer allowable and can trigger benefit in kind taxes.

For example, if the total costs of the party come to £160 per head, then the full £160 must be included via PAYE on,each of the employees P11Ds.

It must be open to all employees

For the event to qualify for the exemption it must be open to all employees at an organisation. If any employees are not invited the exemption will not be granted.

This means that if a function is only open to directors of the company and/or to employees of a certain salary, the event will not qualify for the exemption.

If certain employees are unable (or choose not) to attend, but were still genuinely invited, then their absence will not disqualify the event from the exemption. 

What if the company only employs directors

If the company only employs directors (for example a sole director in an owner managed business) then as they are the only invitees, the exemption will still apply.

Are companies with only one director/employee allowed to have an annual party?

Yes, if the company only employs one director/employee it is still allowed to hold an annual social function and up to £150/head spent on the event is tax exempt.

Are guests allowed to attend?

Yes, guests are allowed to be invited to and may attend the event. Their presence counts towards the head-count, so in theory, inviting more guests reduces the cost per head. This means that you can spend up to £150 per guest and this will also be covered by the exemption.

Is there a limit to the number of guests allowed to be invited to the annual staff party?

No statutory limit has been set on the number of guests, so in theory, an unlimited number may be invited. However, a word of caution, HMRC are likely to view an excessive guest list as an attempt at aggressive tax planning and could argue that the event fails to meet the ‘wholly and exclusively necessary’ test and so not be allowable at all for business purposes.

A sensible approach would be to limit the event and to only allow employees and their plus ones.

Does the annual staff party have to be for Christmas?

No, the party does not have to be in December or celebrating Christmas. So long as the party is an annual event, the exemption is granted.

Multiple Events

The £150 exemption can be split across multiple social events throughout the year.

Where there are several events in the same tax year, the employer can designate which ones should be taken into account to make best utilisation of the £150 exemption. For example, if there are three events (a) £105 per head (b) £75 per head (c) £35 per head, the business could nominate (a) and (c) as this would use £140 of the exemption or (b) and (c) as this would use £110 of the exemption (but not be as efficient per head) but not all three as these would be cumulatively greater than £150.

Using the above examples, if some staff attended only the two events that were elected for the tax free exemption, while others attended only the non-elected event, those attending the non-elected event would not benefit from the exemption, even if their respective cost per head to the company was still equal to or less than £150.

Definition of annual

Although the word ‘annual’ is used, this does not mean that the same event has to be celebrated each year, nor does it mean that the event has to be at the same time each year. In general the term implies that one staff party per year is allowable for this exemption.

There is case law where the term ‘annual’ means something other than ‘occurring every year’ (see: https://vlex.co.uk/vid/ryall-v-hoare-ryall-806944549), for example, something lasting an entire year, however, not only would it be very difficult to stretch a budget of £150/head by 365 days, we believe that HMRC may view this definition of the annual staff party as aggressive tax planning and would not recommend it.

Does it have to be a ‘physically present’ party?

Due to the COVID-19 pandemic in 2020, HMRC have confirmed that the annual staff party does not require employees to be physically present. So, provided the total cost of the party and its associated expenses do not exceed the per head threshold (see below), a digital party is also considered an allowable expense. 

Any questions?

If you have any questions relating to the annual staff party, please feel free to share them on our community page here.

References and further reading


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