Summer staff parties - What's all the fuss about?

The sun is shining (sort of!) and you’re planning on holding a summer event/party for your employees, in the hope of soaking up some rays and boosting team morale. But what is HMRC’s opinion on this? Soften the tax blow by being aware of the rules, and don’t get stung by the taxman!

The general principle is that if you provide employees with a perk or benefit, including staff parties, then this is a taxable benefit for the employee, meaning your employees will have to pay tax on this. BUT, an exemption to this applies, provided that you meet the following conditions:

• The party/event is an “annual event”
• The event is open to all employees
• The average costs of the event (or events if you hold more than 1 per year) per head for all employees attending does not exceed £150 INCLUDING VAT. This magic £150 figure also includes putting on transportation to the event itself, should you wish to do so.

Whilst appearing to be a rhetorical question, “annual” is interpreted by HMRC as “something that happens once a year on a recurring basis”. Summer events or Christmas galas therefore would fit the bill nicely, whereas regular meals out or afternoons at the races would be unlikely to qualify! Similarly, one-off events to mark an anniversary or important milestone in your business by their very nature cannot be considered as “annual”.

The main thing to note is that your “intention” must be for the event to be an “annual” one. Provided that this is communicated clearly in your invite, then it will pass this test.

If your business has more than one location, an annual event that’s open to all of your staff based at one location still counts as exempt. You can also put on separate parties for different departments, as long as all of your employees can attend one of them.

If any of the events cost less than £150 per head, and you meet the 3 tests listed above, then you will be able to count these costs as exempt. But you cannot do this if you’ve already used up the £150 exemption on another event. HMRC provides a useful example on this, which I’ve outlined below:

A company holds 2 annual dinner dances open to all its employees in the tax year. The total cost of the first, including transport and accommodation provided for certain guests, was £10,000 including VAT. The total number of persons attending was 100 and the cost per head was therefore £100.

The second dinner dance cost £8,000 including VAT, and 100 people attended this. The average cost was therefore £80.

The total cost per head for both functions was £180 so they cannot both qualify for exemption. Since the cost per head of each party on its own was not more than £150, either event can qualify for exemption on its own but it is more beneficial overall for the first to be exempted (since it cost more!). So the benefits arising from that function will not be charged and those arising from the second function will be charged!

It's worth noting that your business will still get a business tax deduction for the cost of all parties and events, and you will be able to recover VAT in full regardless of the cost per employee, provided the purpose of the event is to reward good work or maintain and improve staff morale. The pitfall lies in the impact on the employee, and saving them from an unwelcome tax charge. Certainly, some food for thought when you’re looking to wine and dine your employees for all of their hard work!

If you have any questions in relation to this article, please contact me or your usual Albert Goodman point of contact.