It might seem odd to think about having to pay tax on a company event, but if employees are provided a free event to go to then it is considered a benefit.
Companies can claim the full cost of an annual function for staff entertainment. The reason for this is because HMRC can then charge the company employers NIC. The employee gets charged both tax and NICs unless the company creates a PAYE settlement agreement and pays that lump of tax for the employee. Sounds a bit like a party pooper! But there is an exemption.
The company can avoid taxes, and the employee can avoid having any tax implications, from an annual company event as long a few rules allowing exemption are followed. In particular:
- The cost per head of providing the event is £150 or less.
- The event is annual and open to all employees and does not have a customer entertainment element to it.
An interesting side-note is that even though the cost limit is £150 per head, this can be used over multiple events, however not in a cumulative manner. For example, if the Summer Party costs £120 per head to put on, and the Christmas party also costs £100 per head to put on, only the Summer Party would be granted exemption as it was below £150. The Christmas party would be subject to the full wrath of employer NICs (although it would still be a tax deductible expense for the company, and same applies for input VAT) - and the employee would pay tax and NICs on a £70 reduced benefit for the Christmas party.
Ideally you would set up the annual staff events to cost combined less than £150 per staff head. So, a summer barbecue costing an average of £75 per head and a Christmas party costing £75 per head would both qualify as exempt from any perk taxes and the company can still write down the £150 costs per head as staff entertainment expenses, and save on tax - use our corporation tax calculator to see the difference.
Another thing to note is if your company is large and there are multiple divisions or teams within the workforce, then a party/event for one of these can still be considered 'all employees' and the exemption allowed.