Staff entertainment can be an important part of business culture, helping to build relationships and improve team morale. But when it comes to the tax deductibility of such expenses, businesses often find themselves confused by HMRC rules. Businesses need to understand the difference between qualifying annual staff events, informal social gatherings, trivial benefits and client entertainment.
In this guide, we explain when staff entertainment is tax-deductible, how the £150 annual event exemption works, how trivial benefits differ, and what employers should do if costs fall outside HMRC’s exemptions.
Table of Contents
- Key Takeaways
- Is Staff Entertainment Tax Deductible?
- What is Staff Entertainment?
- How to Handle Staff Entertainment Exemption
- What is a P11D Form?
- What are PAYE Settlement Agreements (PSA)?
- Managing Staff Entertainment Expenses: A Practical Guide
- Need advice?
- FAQs on Staff Entertainment
Key Takeaways
- The £150 figure is an annual event exemption, not a general staff entertainment allowance.
- If the exemption is exceeded, the full cost of the relevant event can become taxable, not just the excess over £150.
- Trivial benefits are separate and can apply to small non-cash gifts costing £50 or less, subject to conditions.
- Client entertainment is generally treated differently from staff entertainment and is usually not deductible for Corporation Tax.
- Taxable staff entertainment can be reported through P11Ds or covered by a PSA.
- Good records are essential, especially for informal events and outings.
Is Staff Entertainment Tax Deductible?
Staff entertainment is usually deductible for Corporation Tax when it is provided for employees and incurred for business purposes. However, whether employees suffer a taxable benefit depends on the nature of the event. Annual staff events can be exempt if they are open to all employees and cost no more than £150 per head, including VAT and associated costs. If the exemption does not apply, the benefit may need to be reported on P11Ds or included in a PAYE Settlement Agreement.
What is Staff Entertainment?
Staff entertainment refers to events, activities or hospitality provided by a business for its employees. Common examples include:
- Christmas parties or summer barbecues
- Team-building events or away days
- Meals, drinks or social gatherings for employees
- Celebrations after business milestones or team achievements
These events can be excellent for culture and staff retention, but they should be recorded properly so the business can demonstrate the tax treatment if HMRC asks questions later.
The £150 annual event exemption
Employers can provide annual staff events without creating a taxable benefit for employees if the event meets the exemption conditions. The event must be annual, it must be open to all employees or all employees at a particular location, and the total cost must not exceed £150 per head.
- The £150 limit is an exemption, not an allowance. This means that if the cost goes over the limit, the taxable amount is not just the excess over £150. The full cost of the event can become taxable for the employees who attend.
Checklist for the exemption:
- Is the event annual, such as a Christmas party, summer party or similar regular function?
- Is it open to all employees, or all employees at a particular location or department?
- Have you included VAT, venue hire, food, drink, entertainment, transport and accommodation in the cost?
- Have you divided the total cost by the number of attendees, including guests where relevant?
- Is the total cost £150 or less per head?
- Have you kept a record of who attended?
What happens if the £150 limit is exceeded?
If the exemption conditions are not met, or if the cost exceeds £150 per head, the event may become a taxable benefit. The employer then needs to decide how to report and settle the tax position.
There are usually two practical options:
- Report the benefit on a P11D for each affected employee, meaning the employee pays the tax and the employer pays Class 1A National Insurance at the rate applicable for the relevant tax year.
- Include the cost in a PAYE Settlement Agreement, often called a PSA, so the employer pays the tax and National Insurance instead of passing the tax cost to employees.
Where there is more than one annual event in the tax year, the exemption can be applied to more than one event, provided the combined cost of the exempt events does not exceed £150 per head. If the total cost of all events exceeds £150, the employer can choose which events to treat as exempt in order to achieve the best tax result.
Trivial benefits are different
Trivial benefits are separate from the annual event exemption. They can be a useful way to provide small, occasional benefits to staff without creating tax or National Insurance charges, provided all the conditions are met.
A benefit will usually qualify as trivial if:
- It costs £50 or less to provide.
- It is not cash or a cash voucher.
- It is not a reward for work or performance.
- It is not provided under the employee’s contract.
- It is not provided through salary sacrifice.
- For directors of close companies, the total value of trivial benefits does not exceed £300 in the tax year.
Examples could include a modest birthday gift, flowers, chocolates or a seasonal hamper, provided the gift is genuinely discretionary and not linked to performance.
It’s essential to understand the difference between staff entertainment and client entertainment under HMRC business entertainment rules. These two categories are treated differently when it comes to tax deductibility.
- Staff entertainment: Costs related to staff entertaining are tax-deductible if they meet the £150 per employee exemption.
- Client entertainment: Unfortunately, client entertainment corporation tax rules state that client entertainment is non-deductible for tax purposes. Only certain expenses related to business promotion may qualify.
It’s crucial for businesses to distinguish between staff entertainment and client entertainment to ensure compliance with HMRC rules.
How to Handle Staff Entertainment Exemption
The staff entertainment exemption of £150 per employee per year is an essential threshold for avoiding tax penalties. To manage this allowance effectively:
- Track events: Keep a detailed record of the number of employees attending events and the total cost per employee.
- Plan events strategically: If you plan multiple events throughout the year, ensure that the costs stay within the £150 limit.
- Be aware of non-taxable benefits: If you’re providing gifts or non-cash rewards to employees, ensure they fall under the trivial benefits exemption (under £50 per employee).
By keeping track of your entertainment costs and adhering to HMRC guidelines, you can avoid costly mistakes and ensure the tax-deductibility of your expenses.
What is a P11D Form?
If you exceed the £150 per employee threshold, it’s crucial to report the extra costs on a P11D form, as these will be subject to tax and National Insurance contributions.
Any benefits that don’t fall within the exemptions can be reported on a form P11D for each employee. The employee is taxed on this benefit, and in the majority of cases, tax is collected via an adjustment to an individual’s PAYE coding notice. The company will also be expected to pay Class 1A National Insurance on the value of the benefit at a rate of 15%.
The question you have to answer here is, ‘Am I happy with my staff being taxed on being entertained by my company?’ If the answer is yes, this is the cheapest solution for the company, although the employees may be a little upset by the unexpected tax bill.
What are PAYE Settlement Agreements (PSA)?
If you prefer not to tax your employees on staff entertainment, you can opt for a PAYE Settlement Agreement (PSA) with HMRC. This agreement allows the employer to pay the taxes due on behalf of the employees, simplifying the process and ensuring employees are not burdened with unexpected tax charges.
Benefits of PSA:
- Simplifies tax reporting for staff entertainment expenses.
- Ensures staff entertainment is tax-free for employees.
- Allows businesses to cover the tax cost on behalf of employees.
However, PSAs come with their own set of costs, as the employer is responsible for paying the tax. Carefully evaluate whether this option makes sense for your business.
Managing Staff Entertainment Expenses: A Practical Guide
Let’s imagine that your business spends more than £150 per employee each year on annual staff events and also holds regular informal pub outings for team debriefs. What are your options to manage these costs while staying compliant with HMRC staff entertainment rules?
Problem 1: Identifying Annual Events vs. Trivial Benefits
The first step is distinguishing between annual events (like your office Christmas party) and trivial benefits (small perks like a gift or lunch). This is important because events exceeding £150 per employee are fully taxable – not just the portion above the threshold.
Let’s break this down with an example:
| Event | Cost per Employee | Action | Tax Implication |
| Team-Building Outing | £20 | Include within the £150 limit | No tax charge (under the limit) |
| Christmas Party | £100 | Include within the £150 limit | No tax charge (under the limit) |
| Summer BBQ | £35 | Include within the £150 limit | No tax charge (under the limit) |
The total cost of these three events is £155 per employee. Therefore, all three events cannot be covered by the annual events exemption. Top Tip:
To avoid paying extra tax, it’s better to strategically allocate your event costs. For example, you can allocate the £100 and £35 events to stay within the £150 limit, leaving the £20 event to trigger a small tax charge.
Problem 2: Managing Informal Pub Outings and ad hoc events.
Informal social events can be more difficult to manage because attendance is often not recorded. For example, if the company card is used for drinks after work, the total cost may be clear, but it may not be obvious who attended, whether directors were present, or whether the cost should be treated as staff entertaining, client entertaining or a taxable benefit.
The best approach is to keep simple records at the time. This does not need to be complicated. A short note showing the date, purpose of the event, attendees, total cost and whether any clients attended will make the year-end tax treatment much easier.
Best Practice: Make a reasonable estimate of attendees and exclude directors who were on holiday or have a reputation for skipping pub nights. For future outings, it’s worth keeping a record of attendees at the start of the evening to ensure accurate tracking.
Summary
Navigating the rules surrounding staff entertainment and HMRC tax deductibility can be complex, but understanding the key thresholds and exemptions is crucial to ensuring compliance and avoiding unexpected tax liabilities. By staying within the £150 per employee exemption for events and utilising tools like trivial benefits or PAYE Settlement Agreements (PSA), businesses can manage their staff entertainment expenses efficiently.
Need advice?
At Recruitment Accountants, we specialise in helping businesses like yours understand the tax implications of staff entertainment and ensure you’re following the right procedures. Want to stress-test your company’s entertainment expenses and ensure tax compliance? Contact our expert team today for tailored advice and guidance.
FAQs on Staff Entertainment
Is staff entertainment tax-deductible?
Staff entertainment is usually deductible for Corporation Tax where it is provided for employees and incurred for business purposes. However, the employee tax treatment depends on whether an exemption applies.
What are HMRC’s business entertainment rules for staff?
The £150 rule is an exemption for qualifying annual staff events. The event must be annual, open to all employees or all employees at a location, and cost no more than £150 per head.
Is client entertainment tax-deductible?
Client entertainment is generally not deductible for Corporation Tax, although employees attending in the course of their duties will usually not suffer a personal benefit charge.
Can we have more than one staff event in the year?
Yes. Multiple annual events can qualify, provided the combined cost of the exempt events does not exceed £150 per head.
Can I claim tax relief for staff entertainment if I spend over £150 per employee?
Yes, the business can usually claim tax relief for staff entertainment, even if the cost exceeds £150 per employee, provided the entertainment is genuinely for employees and incurred wholly and exclusively for the business. However, the £150 per head limit is still very important because it affects whether the employee has a taxable benefit.
What is a PAYE Settlement Agreement (PSA)?
A PAYE Settlement Agreement, or PSA, allows an employer to make one annual payment to HMRC to cover the tax and National Insurance due on certain minor, irregular or impracticable expenses and benefits. Staff entertainment is often dealt with through a PSA where the employer does not want employees to bear the tax cost.
A PSA can be useful where the taxable benefit is difficult to allocate precisely between employees, or where it would damage goodwill to pass the tax cost to staff. It is usually more expensive for the employer than using P11Ds, but it can be cleaner from an employee relations perspective.
Are gifts to employees tax-deductible?
Gifts to employees can be tax-deductible if they fall under the trivial benefits rules, which include gifts valued under £50 and provided for personal reasons rather than performance-based.
