Employment taxes and entertainment

Entertainment expenses can be a significant cost to businesses. They also bring tax implications that must be navigated carefully. As we head into Christmas party season, we look at the employment tax treatment of annual staff events.

The good news for employers is that annual staff events can qualify for a tax exemption under the Income Tax (Earning and Pensions) Act 2003 (‘the Act'). This exemption can apply to the below.

• An annual party or similar annual function;
• which is available to employees generally, or to employees generally at one location (where the employer has more than one location); and
• where the cost per head of the party or function does not exceed £150.

Where two or more of such parties or functions are provided in the tax year, the exemption can apply to one or more of them if the cost per head of the exempt party or parties does not exceed £150 in aggregate. 

The exemption could cover the typical annual staff party such as the Christmas party, or summer barbeque. It will generally not include other staff entertainment such as leaving drinks, weekly or monthly events, and other ad-hoc staff entertainment. These are unlikely to satisfy the ‘annual’, or ‘available to all staff at the location’ tests, which must be satisfied. For trivial benefit in kind purposes, they may be unlikely to satisfy the ‘not a reward or in recognition of services’ condition.

For events that satisfy the other tests in the Act, the exemption only applies where the cost is £150 or less per head. This is an exemption, rather than an allowance. If the event cost exceeds £150 per head, inclusive of VAT and other associated costs, even by as little as 1p, the whole amount is taxable, not just the excess. In certain cases, the trivial benefit exemption may also apply. 

Employers must consider the full cost of the event inclusive of associated costs such as VAT, transport home, entertainment, food and drink, and decorations for example.

Employers do not necessarily need to have one event each year to qualify. They may have one at each location or departmental events. Providing all employees are invited to one event, it can still qualify for an exemption. However, care needs to be taken that employees do not go to multiple events.

An employer must take reasonable care to calculate the annual cost per head. They must keep sufficient records to prove to HMRC, if required to do so, who attended any event so that the cost per head can be accurately calculated. When a failure to take reasonable care leads to a loss of tax, tax penalties can apply and HMRC can then go back six tax years to recover the tax and National Insurance underpaid.

If the staff entertainment event does not qualify for an exemption, a taxable benefit arises on the employee in respect of the cost, however, employers can arrange for a PAYE Settlement Agreement (PSA) to pick these costs up. The other good news is that, at the date of this article, it is not too late to obtain a PSA for the 2023/24 tax year.

For more information, read this Tax Voice article or contact Susan Ball, Lee Knight or your usual RSM contact.