A staff party or an annual function qualifies as a tax-free benefit for your employees. The total cost must not exceed £150 per head, per year.- £150 includes VAT together with any extra costs such as transport and accommodation.
- The £150 is a limit and not an allowance: if the cost is £151, the whole benefit is taxable.
- The event must be primarily for entertaining staff.
- The event must not just be for directors unless all your staff are directors.
- The cost of the whole event is an allowable expense for your business.
- You can claim back input VAT but this may be restricted where you are also entertaining customers.
Virtual Parties - In light of the social distancing restrictions imposed by Covid-19, many staff parties are being held online. Virtual parties, where staff join using video conferencing or some other IT software, have been added to HMRC’s guidance regarding annual functions qualifying for a tax exemption.
- If the party is held using IT and meets all of the other conditions, then it will be exempt.
VAT and Annual functions - Input VAT is fully reclaimable on the cost of the function (as it is ‘staff welfare’ and not regarded by HMRC as entertaining)
If you are also entertaining UK clients as well as staff, you have to disallow a proportion of input VAT (based on the numbers of clients v staff). | 
