Is Staff Entertainment Tax Deductible

Introduction

At Towerstone, we provide accountancy services in Bedford to local sole traders, landlords, and limited companies. We have written an article about Is Staff Entertainment Tax Deductible to help you understand when staff events qualify, what limits apply, and how to record the costs properly.

This is a question that comes up every year without fail, usually around Christmas or after a company away day. I hear it from business owners, directors, and office managers who want to do something nice for their team but are unsure where they stand with HMRC. From my experience, staff entertainment sits right on the line between what feels like a business cost and what HMRC is willing to allow.

The short answer is yes, staff entertainment can be tax deductible in the UK, but only when it meets specific conditions. It is also treated very differently to client entertaining, which often catches people out. Understanding the distinction properly can save you tax and help you avoid unexpected benefit in kind charges or disallowed expenses.

In this article I will explain what staff entertainment means in tax terms, when it is deductible, how it is treated for corporation tax and income tax, what happens with VAT, and where businesses commonly make mistakes. I will also share real world examples and practical advice based on what I see in practice year after year.

What staff entertainment actually means

Staff entertainment refers to events or activities provided for employees that are primarily social in nature rather than directly linked to their day to day duties.

Typical examples include:

Christmas parties
Summer parties
Team meals
Staff away days with a social element
Team building events
Celebratory meals after hitting targets

The key point is that the entertainment is for employees, not for clients or prospective customers.

HMRC treats staff entertainment as a potential business cost because it can be linked to employee welfare, morale, and retention. That said, the rules are precise and the context matters.

Staff entertainment versus client entertaining

This distinction is absolutely critical.

Client entertaining is almost never tax deductible. HMRC sees entertaining clients as a cost of winning or retaining business and specifically disallows it for tax purposes. That includes meals, drinks, tickets, and hospitality provided to customers or suppliers.

Staff entertainment is different. HMRC accepts that spending money on employees can be part of running a business properly.

From experience, many problems arise when events involve both staff and clients. In those cases the costs usually need to be split and the client portion is disallowed.

If you take one thing away from this article, let it be this. Staff entertainment and client entertaining are not treated the same for tax, even if the event looks identical.

Is staff entertainment tax deductible for a limited company?

For limited companies, staff entertainment is generally tax deductible for corporation tax purposes as long as it is incurred wholly and exclusively for the purposes of the trade.

This means the cost must be genuinely related to employees and not mainly for directors personally or for clients.

Examples that are usually deductible include:

An annual Christmas party for staff
A summer barbecue for employees
A team meal following a staff meeting
A staff awards evening

These costs reduce the company’s taxable profits and therefore reduce the corporation tax bill.

However, deductibility for the company does not automatically mean there are no tax consequences for employees or directors. That is where benefits in kind come into play.

Is staff entertainment tax deductible for sole traders?

If you are a sole trader, the position is more restrictive.

You cannot entertain yourself and claim it as staff entertainment. HMRC does not accept that a sole trader can be both employer and employee for these purposes.

If you have employees as a sole trader, staff entertainment costs relating to those employees can be deductible.

For example, a sole trader with three employees who pays for a Christmas meal for the team can usually deduct the employee portion of the cost. The sole trader’s own meal is not deductible.

From experience, this distinction surprises many sole traders and often leads to over claims.

The annual staff party exemption

One of the most important reliefs to understand is the annual staff party exemption.

HMRC allows employers to provide annual events for staff without triggering a benefit in kind as long as certain conditions are met.

The conditions are:

The event is annual
It is open to all employees or all employees at a particular location
The cost does not exceed £150 per head including VAT

If these conditions are met, there is no benefit in kind for employees and no employer National Insurance.

This exemption applies per tax year and can cover more than one event as long as the total does not exceed £150 per head.

From experience, this is one of the most underused and misunderstood reliefs available to employers.

What counts towards the £150 per head limit

The £150 limit includes everything related to the event.

This means:

Food and drink
Venue hire
Entertainment
Accommodation if included
Transport such as taxis or coaches

It also includes VAT.

The cost is calculated per head, including employees and any guests such as partners. Guests count towards the headcount and the cost attributable to them is included.

If the total cost exceeds £150 per head, the entire amount becomes taxable, not just the excess.

This is a key point that often catches people out.

Example of the £150 rule in practice

Let me give a simple example.

A company has 10 employees and holds a Christmas party. The total cost including VAT is £1,400.

£1,400 divided by 10 is £140 per head.

This is within the £150 limit, so there is no benefit in kind and the cost is deductible for the company.

If the total cost had been £1,600, the per head cost would be £160.

In that case, the full £160 per employee becomes a taxable benefit, not just the £10 over the limit.

From experience, this is why careful planning matters.

What if the event is not annual?

If an event is not annual, the £150 exemption does not apply.

This means one off events such as a spontaneous team meal or celebration do not qualify for the exemption.

However, that does not automatically make them non deductible for the company. The company can still usually deduct the cost for corporation tax.

The issue becomes whether the cost creates a benefit in kind for employees.

In many cases, small ad hoc staff entertaining can be covered by the trivial benefits rules if the cost is low enough.

Trivial benefits and staff entertaining

The trivial benefits rules allow employers to provide small non cash benefits to employees without tax consequences.

The conditions are:

The cost is £50 or less per employee
It is not cash or a cash voucher
It is not a reward for work or performance
It is not contractual

Examples might include:

A modest team lunch
A small gift or meal
A coffee and snacks after a meeting

For directors of close companies, the total value of trivial benefits is capped at £300 per tax year.

From experience, trivial benefits are often a better fit for small team meals than the annual party exemption.

VAT on staff entertainment

VAT treatment is another area of confusion.

VAT on staff entertainment is generally reclaimable if the cost is for employees and not clients.

This includes:

Meals for staff
Staff parties
Team building events

If an event includes both staff and clients, VAT must usually be apportioned and the client portion is not reclaimable.

If the VAT invoice is in the company name and clearly relates to staff, VAT recovery is usually straightforward.

From experience, VAT is more often over claimed than under claimed in mixed events.

Staff entertainment and directors

Directors are employees for tax purposes, but HMRC looks closely at events that mainly benefit directors.

If an event is essentially for directors with little or no wider staff involvement, HMRC may argue it is not genuine staff entertainment.

For example, a meal for two directors in a company with no other employees is unlikely to be accepted as staff entertainment.

In those cases, the cost may still be deductible for the company, but it is more likely to be treated as a benefit in kind for the directors.

Context and consistency matter a great deal here.

Team building events and away days

Team building events often blur the line between work and entertainment.

If an event has a clear business purpose such as training planning or strategy sessions, the cost is usually deductible and not treated as entertainment.

If the event is mainly social, it is treated as staff entertainment.

Many away days include both. In those cases, HMRC may expect a reasonable apportionment between business and social elements.

From experience, documenting the agenda and purpose of the event helps support the treatment.

What is not tax deductible as staff entertainment

Some costs are commonly misclassified as staff entertainment but are not allowed.

These include:

Entertaining clients even if staff are present
Entertaining yourself as a sole trader
Lavish events mainly benefiting directors
Events exceeding exemption limits without reporting

Trying to force these through as deductible staff entertainment is a common cause of HMRC challenges.

How staff entertainment appears in accounts and tax returns

Staff entertainment costs are usually included within staff welfare or staff costs in the accounts.

For corporation tax purposes, they reduce taxable profits.

If a benefit in kind arises, it must be reported on a P11D or through payroll and employer National Insurance may apply.

From experience, many issues arise because the accounting treatment and the payroll reporting are not aligned.

Common mistakes I see with staff entertainment

Every year the same issues appear.

Assuming all staff entertaining is tax free
Forgetting the £150 per head limit includes VAT
Not counting guests in the headcount
Mixing staff and client entertaining without splitting costs
Failing to report benefits in kind
Claiming staff entertainment as a sole trader for yourself

None of these are unusual, but all can be avoided with basic planning.

How planning saves tax

Staff entertainment is one area where a little planning goes a long way.

By planning event costs carefully, you can:

Stay within the £150 exemption
Avoid benefit in kind reporting
Reclaim VAT correctly
Ensure corporation tax relief is available

From experience, businesses that plan ahead enjoy staff benefits without tax surprises.

Is staff entertainment worth it from a tax perspective?

Tax should never be the only reason you spend money, but it should be understood.

Staff entertainment is rarely tax free in the sense of costing nothing. It is tax efficient when structured correctly.

The real value often lies in staff morale, retention, and culture rather than the tax deduction alone.

That said, getting the tax treatment right avoids unnecessary costs.

Practical advice from experience

If you are considering staff entertainment, I suggest the following approach.

Decide whether the event is annual or ad hoc
Estimate the total cost including VAT
Calculate the per head cost including guests
Decide whether the £150 exemption or trivial benefits apply
Keep invoices and attendee lists
Split staff and client costs clearly
Ask before the event if you are unsure

This approach keeps things simple and defensible.

Forward thinking on staff entertainment

HMRC scrutiny around benefits in kind is increasing, not decreasing.

Digital reporting and payroll integration make it easier for HMRC to spot inconsistencies.

Businesses that document their reasoning and apply the rules consistently will always be in a stronger position.

The key takeaway

Staff entertainment can be tax deductible and tax efficient when done properly. It is one of the few areas where HMRC recognises the human side of running a business.

The problems arise when assumptions are made or when staff and client entertaining are blurred together.

From my experience, the safest approach is clarity. Know who the event is for, know the cost per head, and know which exemption you are relying on.

Handled properly, staff entertainment rewards your team without rewarding HMRC unnecessarily.

For further guidance across related topics, visit our Bedford Accounting Hub, which brings together practical advice for Bedford clients.