For pubs, bars and hospitality businesses, staff entertaining is more than a nice extra. It plays a real role in staff welfare, retention and morale in an industry where long hours, late finishes and seasonal pressure are the norm. From a traditional staff Christmas party to a summer BBQ or end‑of‑season get‑together, these events matter, but the tax treatment needs careful handling.

Many licensees assume staff events are automatically tax free. In reality, HMRC applies strict rules, and misunderstanding the staff entertaining limit can easily turn a well‑intentioned staff party into a taxable benefit.

Understanding the annual function exemption

The main relief available is the tax exemption for a staff annual function. This applies where an annual event is provided primarily for employees and meets the 150 per head limit.

The £150 threshold is not a per‑event allowance. It is a total annual cap across all annual functions held during the tax year. This is particularly relevant for hospitality businesses that run more than one event, such as a Christmas party and a summer party, or where different teams celebrate at different times.

The cost per head must include the whole cost of the event. That means food, drink, entertainment, room hire, transport and any overnight accommodation where relevant. These are all costs incurred in providing the function and must be included when calculating the total cost.

If the combined cost of all events exceeds £150 per head, the exemption does not partially apply. Instead, a fully taxable benefit arises on the entire amount of the event that fails the test.

More than one event, separate events and different departments

Hospitality businesses often host more than one event in a year. HMRC allows this, but only one event (or combination of events) can qualify for the exemption if the £150 limit would otherwise be breached.

Where there are two parties, the business can choose which event benefits from the exemption. In practice, this is usually the most expensive one, with the other becoming taxable.

There can be scope to treat events as separate events where they are genuinely independent, for example, events for different departments or different venues with their own teams. In such cases, it may be possible to expense separately and assess each function on its own merits, particularly where staff work at a normal place of business and do not mix with other teams.

However, care is needed. Events held on the same date, at the same venue or organised centrally may be treated as a single event by HMRC, even if attendance is split.

When a taxable benefit arises

If the exemption does not apply, a taxable benefit arises for each staff member attending. This creates a benefit in kind, which is subject to income tax and national insurance contributions.

For employers, this can result in unexpected tax and national insurance costs. For employees, it can mean a reduced take‑home pay if the benefit is reported through payroll.

Many hospitality businesses choose to deal with this via a PAYE settlement agreement. A PSA allows the employer to pay tax on behalf of staff, rather than passing the liability on. This is often preferable where individual benefits are small but widespread across a team.

Business entertaining versus staff entertainment

It is crucial to separate staff entertainment from business entertaining. Entertaining customers, suppliers or other contacts is classed as business entertaining, and the tax treatment is very different.

Business entertaining costs are not tax deductible for corporation tax or income tax purposes. By contrast, qualifying staff entertainment can be a tax deductible allowable expense, provided it meets the exemption conditions or is properly reported as a benefit.

Where other guests attend a staff event (for example, regulars invited to a pub party) only the employee’s attendance can be considered for the exemption. The cost relating to non‑employees falls under entertaining expenditure and must be treated separately.

VAT and input tax considerations

From a VAT perspective, input tax (or input VAT) can usually be reclaimed on qualifying staff entertainment, including food and drink provided to employees. This is helpful for pubs and bars where entertaining often takes place on site, using their own stock.
However, input VAT is not recoverable on business entertaining, and care is needed where events include other guests.

Apportionment may be required so only the staff element is reclaimed.

Practical examples for hospitality businesses

Example 1
A pub hosts a staff Christmas party costing £110 per head and a summer party costing £50 per head. The combined cost is £160 per head. The pub applies the exemption to the Christmas party. The summer event becomes a taxable benefit, creating a tax liability unless covered by a PSA.

Example 2
A multi‑site operator runs separate staff events for two venues with no shared staff. Each event costs £140 per head. Because they relate to separate events and different teams, the exemption applies to both.

Example 3
A bar invites staff and selected customers to a party. Only the staff benefit element qualifies. The cost relating to customers is business entertaining and is not tax deductible.

Common pitfalls we see in pubs and bars

• Assuming the £150 limit applies per event, not per year
• Forgetting to include room hire or accommodation in the cost per head
• Treating mixed staff and customer events as fully exempt
• Reclaiming input VAT on business entertaining
• Not planning for the tax year when multiple events are held

Getting it right

With staff costs already high in hospitality, the last thing licensees need is an unexpected tax bill. With proper planning, most staff parties, social functions and events can be structured to remain a tax free benefit, or at least managed efficiently using a PAYE settlement agreement.

HLWA are BII Accredited Advisors to the Licensed Trade, working with pubs, bars and hospitality businesses across Bristol, South Wales and the South East. We understand how staff entertaining works in the real world, from late‑night lock‑ins to multi‑site teams, and we help licensees stay compliant without killing the culture that keeps good staff.