Staff Entertainment and Tax
There is no better way of boosting morale within your business than by entertaining your staff in a social setting. It provides a sense of reward, strengthens bonds and allows your team to unwind. It may come as a surprise, but staff entertainment is a legitimate tax-deductible business expense. Businesses registered for VAT are also able to claim back VAT directly linked to staff entertainment.
Technically there is no cap on the amount you can claim back; however, there are some catches. Here’s a run-down of the key things you need to bear in mind when considering whether your staff entertainment qualifies as tax deductible:
Who are you entertaining?
If you are a sole-trader or partner in a business, you are technically not a member of staff. Proprietors cannot reclaim tax on staff entertainment for them alone. It sounds obvious, but other staff members must be present. Two business partners holding a meeting over lunch are not eligible; two business partners holding a celebratory lunch with a group of legitimate employees fits the criteria.
What’s the motive?
To make an eligible claim, the entertainment must be for the good of the business. This can be a grey area, and particular attention must be paid to the dynamics of those in attendance. Say an event is organised and it is attended by the proprietor and their spouse, who is an employee of the company. If a number of other staff members are present, it would be valid. However, were it just the proprietor and their spouse, the motive is less clear and it is unlikely to be justified as tax deductible. The same applies to family members and close friends. This issue needs to be treated with a degree of caution and must be dealt with ‘within reason’ depending on the circumstances.
Is there a catch?
As is often the case, there’s a catch when it comes to staff entertainment and tax relief. Technically, every employee should pay income tax on any benefit or material incentive gained in the course of their employment. Employers are also liable to pay 13.8% National Insurance when entertaining staff. This creates the potential for a messy and demoralising situation where the staff you were seeking to treat end up losing out. One way around this is for the employer to absorb the financial burden. However, there is a way that will help ensure nobody loses out.
Annual Party Exemption
Used in the aftermath of thousands of Christmas parties, the annual party exemption permits a tax-free staff entertainment buffer of up to £150 per person. As an added bonus, this allowance can actually be spread out over several events.
There are a few caveats to be aware of though:
- It only applies to annual events. On this basis, a recurring summer ball or Christmas party are covered, but spontaneous Friday night drinks are not.
- The event in question must be open to all staff and not exclude any employee regardless of their grade, role or working hours. With this in mind, functions exclusive to managers are not eligible. However, you can apply this to specific offices, providing it remains open to every employee based in that specific office.
- If the expenditure of the staff entertainment function, including VAT, exceed £150 per person, none of the costs fall under the exemption.