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In every business, people love a good party. No matter what is the occasion, be it the annual Christmas party, a summer get-together, or a small virtual celebration, staff entertaining helps boost morale and it also builds stronger teams. But when it comes to tax, the rules are not always as cheerful. It is important to keep things in check from tax perspective. Thus, having an expert tax professional, such as MMBA Tax experts by your side can ease things a lot.
Let’s talk about the staff entertaining limit and how you can keep things tax-efficient.
Table of Contents
What Is the Staff Entertaining Limit?
HMRC allows a tax-free benefit for annual staff events. However, it does have a limit, one can get it up to £150 per head each tax year. This isn’t an allowance. But is an exemption that applies if certain criteria are met. The event must:
- Be an annual event (like a Christmas party or summer party)
- It must be open to all employees or to all employees at one location (if the company has more than one location)
- It must not exceed the £150 per head combined cost. It must include room hire, food, drinks, and other associated costs
- If the total cost goes beyond £150 per head, the whole cost becomes a fully taxable benefit. It must not be just the excess.
How to Calculate the £150 Per Head
The per head cost includes everyone who attends the event. For instance, staff members, other employees, and guests. For example, if the total cost of your work Christmas party is £3,000 and 20 people attend, then the cost per head is £150. That means that the event is within the tax-free limit.
However, if only directors attend or the event is exclusive to different departments, you must expense separately, as not all employees were invited. In such cases, the cost might not qualify for tax exemption.
Two Parties or More?
You can hold more than one staff annual function, like a Christmas party and a summer party, and still enjoy tax relief. But again there are certain limits, the one very important is that the combined cost doesn’t exceed £150 per head.
If the total of all annual functions goes beyond £150 per head, you can choose which events remain tax free and treat the others as a taxable benefit.
How They Work Together
If one compares financial and management accounting, it’s important to note that both are complementary. Both of them, the financial accounting and management don’t work in isolation. Data from financial statements often feeds into management accounting reports. This helps the leaders to analyse company’s performance and make strategic planning decisions.
For example, if a chartered accountant prepares a cash flow statement under IFRS changes; he may highlight liquidity issues. A managerial accountant could then use that information to create forecasts. He often adjust budgets, or suggest cost accounting strategies. The intention always behind this is to improve operational efficiency.
Tax Relief and VAT Treatment
Staff entertainment can be a tax deductible expense when it’s genuinely for staff welfare and morale.
Another aspect is input VAT on costs. Your limited company can claim input VAT on costs related to staff entertainment. This also includes including room hire, food, and drinks. But it is important to note if other guests such as clients or spouses attend, then you’ll need to apportion and expense separately, as the VAT on those portions may not be recoverable.
But having a tax expert by your side can greatly make the difference.
PAYE and National Insurance Liabilities
In case your event fails to meet the exemption criteria, in such scenario, the staff party becomes a taxable benefit. In such cases, employees may need to pay tax, and employers could face National Insurance liabilities. To simplify matters, you can cover the tax via a PAYE Settlement Agreement (PSA). In this case, the company pays the tax on behalf of its employees.
Conclusion
Planning a staff entertaining event should be fun, and must not be stressful. One has to keep records, track the total cost, and make sure that every staff benefit meets HMRC’s following criteria. Done right, your annual Christmas party or summer celebration can remain a tax-free morale booster instead of a fully taxable benefit.
Frequently Asked Questions
Can I claim input tax on staff entertainment?
Yes, you can claim input tax on staff entertainment. But you can do it only if the event is for company staff only. However, if guests or clients attend, you’ll need to expense separately for the non-staff portion.
Is the £150 per head limit an allowance?
No, the £150 per head is not an allowance. But it is an exemption. If your social functions or annual events exceed £150 per head, then the whole cost becomes taxable instead of just the excess amount.
Do virtual parties qualify for tax relief?
Yes, virtual parties do qualify for tax relief. For instance, social functions under HMRC’s rules, provided they meet the same criteria. However, it has to be open to all employees and within the £150 per head limit.
Can I host separate events for different departments?
Yes, you can host separate events for different departments. But the limitation is that each one has to open to all employees within that department. Still there is an exception of combined cost of all events that must not exceed £150 per head to stay within the allowable deduction rules.
How does a PAYE Settlement Agreement work for a limited company?
A PAYE Settlement Agreement (PSA) works for a limited company by allowing it to pay the tax and National Insurance due on certain staff benefits. The benefits include entertainment, so employees don’t have to handle the tax themselves.
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