Staff entertainment is a legitimate business expense that cover a range of elements, making it an essential aspect of fostering a positive work environment.
However there are a few considerations you need to be aware of before you splurge out on your employees about how you spend on staff entertainment, what is allowable and the staff entertainment allowance.
Allowable Staff Entertainment Costs
Allowable costs for staff functions include:
- Food
- Drink
- Entertainment
- Venue Hire
- Transport
- Overnight Accommodation
For VAT registered businesses, there’s an added benefit – the ability to recover VAT incurred on allowable staff entertainment expenses.
Annual Party Exemption
Each member of staff has an allowance of up to £150 which can be exempt from both Income tax charges and employers National Insurance.
This can be spread across multiple functions as long as the total spend doesn’t exceed £150.
Things to bear in mind;
- The exemption only covers annual events e.g Christmas Party, it does not cover ‘casual hospitality’ (taking staff for a drink on a Friday night)
- It must be available to all staff and not exclude employees e.g ‘management only’
There are some restrictions to the relief as follows;
- Sole traders and business partners are proprietors, not staff, so entertaining spend for them alone is not allowable. Staff members would need to be present for there to be a claim.
- Staff entertainment is to boost staff morale to make it an allowable cost where a staff member is also a relative; any entertaining expenditure in these cases is potentially a personal expense.
- In a small business, the proprietors are all colleagues and often considered ‘friends’, claiming entertaining is still allowed but most be ‘within reason’.
Staff Entertainment Tax implications
In principle, an employee is liable for Income Tax on the value of any benefit provided by reason of their employment. This includes the cost of any staff entertainment. It even includes so-called benefits like the cost of sandwiches provided at a lunchtime staff meeting.
On top of this, the employer is also liable for Class 1A National Insurance at 13.8% on the cost of the staff entertainment. The ‘cost’ of entertainment, for both Income Tax and National Insurance purposes, must include VAT, even if the employer is able to recover it.
None of this affects the business’s ability to claim a deduction for the expenditure. It’s like a salary – the employee pays Income Tax, you pay employer’s National Insurance and the business gets a tax deduction. (The only difference is that the employee does not also pay National Insurance, so there is a small saving.)
Nevertheless, taxing employees on entertaining expenditure is an absolute disaster when the original motive was to improve staff morale.
Fortunately, there is a way to get around this problem besides the Annual Party Exemption. The employer could make a voluntary settlement. For further details on that see our FAQ- What is a PSA agreement with HMRC ?