Staff Entertainment – Tax Exempt or Benefit-in-Kind?

By Kate | August 1, 2023

Do you provide occasional entertainment to your employees? There’s a common misconception that staff entertainment is automatically exempt from tax – and with a lack of clear guidance from HMRC, many businesses are under-reporting it for benefit-in-kind (BiK) purposes. In this article, we’ll help you understand when entertainment is and isn’t taxable, so you can proactively plan to minimise your tax liabilities, keep the correct records, and ensure the right amounts are reported to HMRC. Carry on reading for more information, or contact our friendly team today for professional advice.

Table of Contents

What is Staff “Entertainment”?

Staff entertainment or hospitality can cover a wide range of activities – from large events (Christmas parties and Summer BBQs) to smaller gatherings (work lunches) – even if they’re incidental to another event, like a staff conference or training session.

When is Entertainment Taxable?

Initially, all staff entertainment is considered taxable – however, you can minimise tax and NI liabilities if you either structure the entertainment to qualify for an exemption (see “Entertainment Exemptions” heading below) or choose an alternative entertainment that does qualify.

If no exemptions apply, entertainment will be classed as a benefit-in-kind, meaning:

It must be reported through P11D forms,
And will be subject to Class 1A National Insurance (NI) at 13.8%.

Alternatively, with HMRC’s agreement, it can be reported through a PAYE settlement agreement, but this method tends to be more costly due to tax grossing up. In cases where an employee’s family or household members are entertained (taxably), the tax liability will fall on the staff member.

HMRC Penalties for Under-Reporting

For tax years where taxable staff entertainment has been under-reported, HMRC could look to recover as far back as four years of tax, and six years of NI. Penalties may also apply, and interest could be charged on the unpaid tax and NI.

If a business makes a voluntary disclosure for past years, and it’s unprompted, this could mitigate potential penalties for underpaid tax – contact us today to see how we can help.

Entertainment Tax Exemptions

There are staff entertainment tax exemptions that apply to certain situations, and other potential reasons for entertainment not to be taxable, such as:

Annual Functions Exemption

This exemption applies to annual parties, provided they’re open to all staff (or all at a particular location), and the cost per head does not exceed £150 (including applicable VAT).

You can also combine the £150 limit across multiple events within a tax year, generally those that would result in the highest benefits – but any thereafter will not be eligible for the exemption. To optimise tax and NI savings, make sure you include events with the highest overall cost rather than the ones with the highest cost per head.

When calculating the cost per head, consider all attendees, not just staff, and factor in all event-related expenses, including food, drinks, transport, and accommodation.

Trivial Benefits Exemption

The exemption for trivial benefits can be used for entertaining at events like an employee’s birthday, seasonal gatherings, and any other non-performance-related occasions (past or future).

Entertaining costs must not exceed £50 per head (including VAT), and the following conditions must be met:

The event must not serve as a reward or incentive for employment services,
Staff should not have a contractual entitlement to the entertaining,
It should not be part of any salary sacrifice arrangement.
And the benefit is not cash or a cash voucher.

Unlike the annual functions exemption, when considering the cost per head, only staff members are included in the headcount. Additionally, if the employer is a close company (a limited company with five or fewer participators), directors and/or office holders have a cap of £300 for such benefits per tax year.

Training Exemption

This staff entertainment exemption applies specifically to activities that are incidental to work-related training – such as courses or activities that enhance or reinforce knowledge, skills, or qualities relevant to an employee’s role, or that will improve their qualifications for the job.

To benefit from this exemption, you can organise fun and engaging events, as long as their primary focus is on training. However, the exemption will not apply if:

Any aspect of the event’s purpose is to provide entertainment unrelated to the training,
Or act as a reward, incentive, or unconnected inducement.

Food, drinks, and temporary living accommodation provided as a consequence of the training are considered incidental. If you are already providing training, you can add an additional tax-free benefit for your staff, as long as the criteria are met.

Subsidised or Free Meals Exemption

The exemption for subsidised or free meals covers those offered at your sites or offices, as long as all staff (or all staff at a specific location) have access to at least one such meal (or light refreshments) within the tax year. The meals should be provided on a reasonable scale and not as part of any salary sacrifice arrangement.

Client Entertainment

It is not taxable when your staff are entertained as a result of entertaining clients – however, ensure that the main reason and purpose behind the event is to develop client relationships, not to entertain your staff. Be prepared for potential HMRC inquiries by maintaining sufficient evidence of the reason (and purpose) for the client entertainment.

Partly Taxable Entertainment

On certain occasions, there will be clear distinctions between taxable and non-taxable elements in entertaining or events. In such cases, each element and event should be individually assessed to determine if any exemptions apply or if there are reasons for a specific element not being taxable.

For instance, consider a staff conference held where a separate event is occurring – that staff can then enjoy with refreshments after the conference finishes. Here, you must differentiate between the elements and costs related to the conference and those associated with the entertainment.

If a single cost covers both the conference and the entertainment that follows, and there was no option to pay only for the conference, then no additional cost for the entertainment is incurred, making it non-taxable.

However, if there was an option to pay separately for the conference and the entertaining element was added on, then the entertaining part needs to be assessed separately to determine its taxability.

Need Advice on Staff Entertainment Taxes?

Looking for comprehensive advice on staff entertainment for tax purposes? Mercian Accountants can conduct a full review of your events and their expenditure and provide tailored guidance to your specific situation. We can also help you with making any voluntary disclosures. Get in touch with our professional team today, either by messaging us through our online form, calling 01743 562430, or emailing hello@mercianaccountants.co.uk.