Entertaining employees (including directors) is an allowable trading expense, provided it is not excessive and is wholly and exclusively for the purposes of your trade, and not just incidental to the entertaining of customers. However, to ensure that the employees are not taxed on the benefit, the event must:
- be an annual occurrence eg Christmas party or summer barbeque,
- not cost more than £150 per head (including VAT), and
- be open to all employees (not just directors), unless the company consists only of directors.
However, confusion can occur over the rules so things to watch out for include:
- If the cost per head is over £150 then the whole amount is a taxable benefit on the employees, not just the excess.
- If you have more than one event per year, the exempt amount is reduced proportionately.
- The exempt amount is not a flat rate that you can claim. You must actually incur an expense and keep receipts, so if the event costs £50 per head, that’s all you can claim.
- The exempt amount includes all expenses incurred (not just food and drink) eg room hire, travel etc.
Directors are eligible employees, so a company consisting solely of directors can have a tax free and tax deductible annual bash. However, self employed people cannot. Subcontractors are not employees and so are not eligible for the exemption. Also this would be business entertaining and would not be an allowable trading expense either.
If there are employees’ partners or friends at the party, then these individuals count as part of the number of people present when you’re working out the amount.
If your business is VAT registered, you should also consider the VAT implications. More information about when VAT is recoverable can be found here.
