Does the taxman like a party?
Sadly the answer is – no, not really. As a general rule the cost of entertaining is not tax-deductible, although there are exceptions. £150 of costs of an annual party for employees and partners can be exempt from NICs and tax for example, as long as a number of conditions are met.
This is not an allowable deduction, so sadly no more long client lunches to write off. The VAT element of entertaining can only be claimed when it relates to staff. However if the staff member is acting as a host, and the purpose of the cost was to entertain the client, then no VAT can be reclaimed at all. So if you have two staff and two guests, you can reclaim VAT for the staff only.
When and how is an annual event exempt from tax?
A company can pay for an annual event if the total does not exceed £150 per head. This doesn’t need to be one event either, just ‘annual’.
So you could have a Christmas party and a summer BBQ, and both would be allowable for tax purposes provided the total of both doesn’t exceed the £150 per head limit (if it goes just £1 over then the whole amount is a benefit in kind, so be careful!) The costs can include food, drink, tickets to events, accommodation and a taxi fare home.
If there is more than one function which in total exceeds a cost of £150, then the exemption is only available on the function or functions which in total come to £150 or less. So say there are two functions costing £100 and £80.
If the employer determines that the £100 function is exempt but the £80 function is taxable in full then if an employee only attends the £80 function, they would be taxed on the £80 benefit in full. If the employee attended both functions, they would still only be taxed on the £80.
And if you’re registered under the flat rate scheme then unfortunately you can’t reclaim any VAT. As with everything when it comes to HMRC, a common sense approach is advised. Basically there are tax benefits to staff parties, but you need to tiptoe through the rules. Confused? Talk to an expert.
Julia Wright, Accountancy Plus