The cost of a staff party or other annual event is normally tax deductible provided the following rules are followed:
- The event must be open to all employees at a particular location. If you are simply a husband and wife company with no employees, you too can avail of a tax free benefit of nice meal out or even a weekend away!
- The cost is only tax deductible for employees and their partners/spouses. This covers directors in a company but not a sole trader or a partner within a partnership.
- The tax deduction only applies to an “Annual” event. This could cover two events for all employees in the year but it does not cover regular staff entertaining such a monthly drink or meal at a pub.
- The average costs per head of the functions (probably maximum two in a year) must not exceed £150 per annum per head. Partners and spouse are included in the head count when computing the cost per head of those attending.
- All costs must be taken into account including the costs of transport to and from the event, accommodation provided, any bands/disc jockeys etc, plus the VAT. The total cost of the event is divided by the number attending to find the average cost per head. If the limit is exceeded, then the whole cost of the event per head is taxed on the individual employee, plus the cost for any guests/non-employees they brought with them.
- Input VAT can be recovered on staff entertaining costs (but not of course if you are using the Flat Rate Scheme for VAT). If staff partners or spouses are attending, the VAT on the cost attributable to those partners or spouses is however not recoverable.
- Where customers or suppliers attend a staff party, the cost attributable to them is entertainment and is not tax deductible and the input VAT on those costs is not recoverable, unless they are overseas customers. If non-staff pay a “reasonable” contribution to the event, then in this case the VAT on their costs would be wholly recoverable but you need to account for output VAT on the consideration you received.
- You can recover the VAT on business gifts made to an individual or business provided the total cost of all the gifts to the same person does not exceed £50 in any 12-month period. You can adopt any 12-month period that includes the day on which the gift is made. Where the total cost of business to the same person exceed £50 in any 12-month period, and you have been entitled to reclaim VAT, you will normally have to account for VAT on the total cost value of all the gifts.