Date posted: 28th May 2019
At this time of the tax year, employers are busily preparing forms P11D to report benefits provided to employees such as company cars, private medical insurance and loans.
However, staff entertaining is sometimes overlooked and can cause issues for employers and employees.
As you may be aware, a statutory exemption exists, which allows employers to meet the cost of certain social events for employees without triggering a liability to tax or national insurance. However, to benefit from the exemption, certain conditions must be met.
Tax law refers to ‘an annual party or similar annual function’. Although HM Revenue & Customs (“HMRC”) do not seem to interpret this to mean that the same event must be held every year, it may be prudent to check the issue in advance where a one-off event is planned.
A staff event will qualify as a tax-free benefit if the following conditions are satisfied:
- the total cost must not exceed £150 per head, per year
- the event must be primarily for entertaining staff
- the event must be open to employees generally, or to those at a particular location, if the employer has numerous branches or departments.
The ‘cost per head’ of an event is the total cost (including VAT) of providing:
a) the event; and
b) any transport or accommodation incidentally provided for persons attending it (whether or not they are the employer’s employees), divided by the number of those persons.
Provided the £150 limit is not exceeded, any number of parties or events may be held during the tax year, for example, there could be three parties held at various times, each costing £50 per head (including VAT).
However, it is important to remember that the £150 is a limit, not an allowance – if the limit is exceeded by just £1, the whole amount must be reported to HMRC.
If there are two parties, for example, where the combined cost of each exceeds £150, the £150 limit would be best to be offset against the most expensive one, however, this leaves the other one as a fully taxable benefit.
An Accountants Ltd pays for an annual Christmas party costing £150 per head and a summer barbecue costing £75 per head. The Christmas party would be covered by the exemption, but employees would be taxed on summer barbecue costs, as a benefit-in-kind.
The latter is likely to likely to have a negative impact, but the employer can settle the tax due, on behalf of the employees (see below). We have successfully negotiated with HMRC in recent years for such a settlement, particularly where a business may have an anniversary party etc.
Tax treatment for employers
The cost of staff events is tax deductible for the business. The legislation provides a let-out clause, which means that entertaining staff is not treated for tax in the same way as customer entertaining. The expenses will be shown separately in the business accounts – usually as ‘staff welfare’ costs or similar.
There is no monetary limit on the amount that an employer can spend on an annual function. If a staff party costs more than £150 per head, the cost will still be an allowable deduction, but the employees will have a liability to pay tax and National Insurance Contributions (NICs) arising on the benefit-in-kind.
The employer may agree to settle any tax charge arising on behalf of the employees. This may be done using a HMRC PAYE Settlement Agreement (PSA), which means that the benefits do not need to be taxed under PAYE, or included on the employees’ forms P11D. The employer’s tax liability under the PSA must be paid to HMRC by 19 October following the end of the tax year to which the payment relates.
It should also be noted that whilst the £150 exemption is mirrored for Class 1 NIC purposes, (so that if the limit is not exceeded, no liability arises for the employees), Class 1B NICs at the current rate of 13.8%, will be payable by the employer on benefits-in-kind which are subject to a PSA.
The full cost of staff parties and/or events will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.
VAT-registered businesses can claim back input VAT on the costs, but this may be restricted where this includes entertaining customers.