‘Tis the season to be jolly… which means that many offices are filled with chatter about upcoming winter social events! But are staff parties deductible, and what are the rules?

The good news is that there are some incentives for limited companies putting on entertainment for their staff. HMRC state states that such events – like staff parties – will be exempt from tax and National Insurance contributions, provided that:

• The total cost of the party cannot exceed £150 (including VAT) per person. An additional £150 per person can be claimed for a plus one for each employee (this person would need to be a family member or employee).
• The party must be open to all employees (and should consist largely of employees). Note that HMRC are quite strict about who can be classed as an ‘employee’: former employees don’t count, and neither do subcontractors. Shareholders also don’t qualify, unless they’re also employees or directors. Typically, an employee is someone who is on the company’s payroll and being paid a salary.
• If you’re a partner in a partnership or LLP, or a sole trader, you also don’t count as an employee and as such staff entertaining is not tax deductible (this is because legally there’s no distinction between yourself and the business).
• The party should be an annual event, like a summer or Christmas party.
• You can also claim an additional £150 per person for a plus one for each employee, provided that they are a family member or partner.

For the sake of clarity: if you’re hosting your Christmas party (an annual event), and this is open to all staff, and costs £150 (or less) per participant, this would qualify – and the party would be tax deductible. However, if any of these boxes are not ticked, the event would be classed as a taxable benefit (even if your event cost, say, £151 per head).

Staff Parties: VAT

For companies that are VAT-registered, there is another potential benefit to be enjoyed. Activities that are put on to boost staff morale or to celebrate their good work – i.e. staff entertaining – are also eligible for VAT deductions, meaning that you can reclaim any VAT you pay toward the event. Bear in mind, though, that in order to reclaim VAT the event must be attended by employees: if there’s a mix of employees and clients, different rules apply.

If the purpose of the event was for your employees to host your clients, this would be classed as broader ‘business entertaining’ and you could not claim back VAT on the cost of the event (it would also not be eligible for general tax relief). However, if the event was mixed – a combination of employees, clients and even employees’ friends/family – but the purpose of the event was to entertain everyone (rather than only looking after clients), you could claim back VAT – but only on the cost of entertaining your employees. If this was the case, you’d have to work out the amount of VAT you paid on the cost of each person and multiply this by the number of employees that attended (you can’t claim back VAT on the cost of entertaining clients or employees’ plus ones).

But remember that this is a grey area, so if you are not sure whether you can claim tax relief or reclaim VAT on a particular cost you should seek professional advice from an accountant who will be able to advise you.

Staff Parties: A Note on Directors

If your business has only directors and no other employees, the issue becomes a little more complicated. HMRC stipulates that tax relief or VAT deductions are not available against the costs of providing entertainment to directors or partners. However, at the same time, HMRC states that VAT can be reclaimed – and tax offset – against the costs of directors or partners travelling away from ‘their normal place of work on a business trip’.  Tax-deductible costs include accommodation, food, and a number of other related expenses. Technically, then, it might be possible for directors (if they are the only employees of the business) to have a celebration meal or a similar event in lieu of a Christmas party, which would be tax exempt, if the event were to take place as part of a business trip that the directors were intending to make anyway (if they had a client meeting, for example).

If you’re holding a staff social or Christmas party and are unsure what tax reliefs are available to you, consult IBISS & Co without delay. Our experienced accountants are up to date with the latest HMRC guidance and will be able to advise you on all aspects of business entertaining.