You want to hold a summer event to entertain your employees and to improve morale. But you are unsure what the tax and NI position will be? Gail Trojan advises.
Normally, business entertainment is not a tax-deductible expense. However, the cost of entertaining employees (including directors), such as by having a staff party, is an exception to this rule. Whether the business is run by a company or is unincorporated it is 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 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.
The other main factors affecting the tax position of business entertainment are the benefit in kind rules. Normally, if you provide employees with a perk, this includes staff parties etc., it’s a taxable benefit. But as you’re probably aware, a limited exemption applies. The main conditions of the exemption are that:
• The party or similar is an “annual” event.
• All employees are invited, but separate events can be held for different departments on different occasions.
• The average costs (including transportation and other related expenses) of the event, or events if there’s more than one in a tax year, per head for all employees and guests attending does not exceed £150 including VAT.
What is an annual event?
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”. This could be interpreted as meaning that only when a pattern of an annual recurrence is established can the exemption apply but this isn’t what HMRC is saying.
An intention to hold an event annually will meet the first condition. What HMRC means is that one-off events don’t qualify. On this point its internal guidance says “it follows from this that a one-off event, for example a party to celebrate a 25th anniversary, cannot be an annual party or function”.
A sensible approach to ensuring the “annual” condition is met for the first time your clients 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 the minutes of a meeting of the directors/partners.
The exemption can apply even if the timing and nature of the annual event varies. 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”.
If you are also planning to have other events, e.g. a Christmas party, it may be that the aggregate costs exceed the £150 limit. In these circumstances, you can exempt any mix of annual events where the combined cost per head is less than £150. You can use the exemption in the way that is most efficient.
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 the intention is to repeat it annually, even if for unforeseen reasons it’s not possible to do so every year.
If you would like to discuss this further, please feel free to contact our team.