It’s often the little things that matter the most. For an employer this could mean hosting a small party or a gathering of the “chosen few” employees. For employers in the UK looking for that silver lining, the HMRC allows for a tax exemption on social functions attended by employees. It’s almost akin to killing two birds with one stone. Employers get to extend a small gesture of appreciation while enjoying the tax-efficient benefits on their entertainment expenses.
So, what is included and what’s not? And what do you actually pay out of pocket [if anything]. This blog will cover all the staff entertainment UK tax rules that employers should keep in mind before throwing that big party. This will ensure that they are in adherence to the tax conditions proposed by HMRC and save money while having a blast.
What Constitutes as a Business Entertainment Expenses
Before we get into the nitty-gritties of entertainment expenses, let’s first look at what qualifies as a business entertainment expense. In the eyes of HMRC, the term covers a range of activities and perks that a business might provide for the purpose of entertaining clients, potential clients, or business partners with the intent of building relationships or rewarding performance.
So, what are examples of entertainment expenses?
- Food and Beverage: This may range from an official meal at a restaurant to a quick coffee meeting. If it’s eaten in a hospitality or social setting, then it probably qualifies as entertainment.
- Events and activities: the expenses of attending or hosting events, including conferences, exhibitions, or sporting events, are classified as business entertainment expenditures, as long as the main aim is business oriented.
- Hospitality: this encompasses expenses associated with entertaining clients or prospective partners, for instance, private dinners, socialising, or networking events.
- Travel costs: if one must travel in order to see clients, costs like accommodation, transportation, and food on the trip can be eligible, provided that these are incurred largely for business.
- Promotional events: promotional events such as product launches or trade shows, may also be classified if the aim is to nurture and enhance business relationships.
Note: Businesses should be clear of what constitutes as an entertainment expense and more importantly, what doesn’t. A clear distinction between business-related expenses and personal entertainment must be made. This will not only ensure that your expenses are tax compliant as per HMRC but are also within budget when managing expenses.
Is Business Entertainment Tax Deductible?
Claiming tax relief or VAT for business entertainment is not part of the HMRC mandate. However, there are certain exceptions to this rule. A good example would be where partners or board members attend a party meant for employees. In some cases, HMRC might consider this as an employee entertainment expense. However, it’s best to check with an accountant with significant knowledge on this subject before going ahead.
But What About Employee Entertainment?
For employees, entertainment costs are those incurred for entertaining the staff of the organization. Anyone who isn’t currently employed in the organization or doesn’t fall under the payroll of an organization is not eligible for employee entertainment.
Examples of individuals not eligible for employee entertainment:
- Sub-contractors or vendors
- Former employees
- Shareholders who do not operate full-time
- Friends or family of employees
- Sole traders for self-employed businesses
What is Included in Employee Entertainment?
Examples of what’s included in employee entertainment:
- Food and drinks
- Entertainment
- Venue hire
- Transport and overnight accommodation
If you are in doubt about whether something qualifies as employee entertainment, speak to an accounting and tax specialist like AcoBloom for detailed advice.
Is Employee Entertainment Tax Deductible?
Employee entertainment meant exclusively for full-time staff is treated as a business expense and is tax deductible. For businesses registered under VAT, recovery of VAT related expenses is also allowed for entertainment expenses HMRC.
However, things can get complicated when you throw in a mix of employees and non-employees. A good example is when an employee brings a friend over for an annual office event. Employers can claim only the amount that the employee incurs during the event. The remaining difference will have to be borne by the friend or the employee in question.
Note: Employee entertainment might also be considered a Benefit in Kind (BIK), which as a result will make it taxable income for the employee. To avoid this from happening, employers should follow guidelines on employee entertainment as prescribed by the HMRC.
Golden Rules to Enjoy Tax-Benefits and Keep HMRC Happy
Rule #1 Keep it Below £150
The HMRC offers a generous exemption through what’s commonly known as the £150-per-head rule. This exemption allows businesses to provide social functions or parties to employees without triggering a taxable benefit, as long as the event is annual in nature and open to all employees. In short, an event is likely to become a taxable benefit if any of the following is true:
- The event is a one-off meal to celebrate a new contract or good work.
- Some employees are excluded.
- The cost per head is over £150.
However, the catch is that the cost for the event should not exceed £150/ person. Not even by a penny. In the event that the limit is exceeded, the entire amount becomes a taxable benefit in kind (BIK) for the employee.
Rule #2 PAYE Settlement Agreement (PSA)
A PAYE Settlement Agreement (PSA) is a gesture that goes outside the scope of the £150 rule. It allows employers to take on the tax burden for certain benefits provided to employees — such as thank-you hampers, gift vouchers, or theatre tickets. This ensures that employees don’t end up with a Benefit in Kind (BIK) on their pay slip. It’s an excellent option for irregular, minor, or impractical-to-report perks that fall outside typical exemptions.
To use a PSA, it must be formally arranged with HMRC in writing. Keep in mind that it has to be in place by 5 July following the end of the tax year in which the benefit was given. So, forward planning is key. Backdating payments or applying for PSA retroactively is not an option.
Under a PSA, the employer pays not only the tax due on the benefit but also Class 1B National Insurance contributions, which are currently set at 13.8%, rising to 15% from the 2025–26 tax year. While this does increase the overall cost for the business, it simplifies reporting and keeps things clean for your team.
What about Director/Partner Only Businesses
As per HMRC rules, the cost of employee entertainment expenses for directors or partners do not qualify for exemption from tax or VAT. For businesses that don’t have employees [particularly seen in startups and small businesses], and partners or directors are transitioning as employees, the issue can get a little more complicated.
Directors or partners who travel for business away from their “normal” place of work can reclaim VAT on cost of travel, accommodation and meals. This also applies for subcontractors, employees, and other professionals who contribute to the business. If you are not sure about tax relief for a specific entertainment expense, it’s best to speak to an experienced accountant who can guide you every step of the way.
Final Thoughts on Entertainment Expenses
Keeping your staff happy and being complaint with HMRC rules on tax relief on entertainment expenses is like killing two birds with one stone. Knowing what is allowed as defined by entertainment expenses HMRC, exemptions involved and what could be considered as a benefit of kind – read P11D, is crucial for a business to enjoy these tax benefits. This blog comprehensively covers this subject, however, if you feel that you have more questions or are not sure about certain exemptions, feel free to drop us a line.
AcoBloom has been supporting accounting practices globally and in the UK with secure and reliable co-sourcing solutions. If you are in need of an outsourcing partner who can get the job done, consider AcoBloom and a reliable partner.
