Many employers provide a number of functions to their staff. Typically, these take the form of some sort of annual event, usually taking place in the summer and / or at Christmas.

The amounts incurred by the employer in respect of the employee are taxable unless there is an exemption from tax.

Qualifying events

An exemption from tax is provided to employees by ITEPA 2003, s 264 where their employer provides them with a social function and a number of conditions are met:

  • the function should be an annual party
  • the event should be available to all employees in the business, or all employees at one location where the employer has multiple locations

Although the legislation includes the term ‘annual’, HMRC has not to date expected the employer to hold the same event every year. However, the event should be of an annual nature such as a Christmas party or summer barbeque. Events which, by their nature, are one-off events will not be covered by this exemption. These are considered in the Entertainment ― staff guidance note.

For example, if an employer is having a celebration because it has been in business for 50 years, this would not be classified as annual for the purposes of these provisions.

The qualifying cost is £150 per person attending the event. The total cost includes all of the costs associated with the function, such as transport, food, drinks, accommodation, etc and the VAT. The VAT element of the cost is often missed in the calculation and can clearly lead to difficulty as the exemption is an all or nothing exemption, not a tax free amount. The total amount is then divided by the total number of people attending in order to calculate the cost per person.

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