Staff parties and client entertainment: the £150 rule, corporation tax and VAT

A single company event can be taxed three ways. For the employees, an annual party open to all staff is tax-free if it costs no more than £150 a head — and that cost includes VAT and any travel or hotel laid on for it. For the company, entertaining staff is deductible for corporation tax and entertaining clients is not. For VAT, staff entertainment can be reclaimed and client entertainment generally cannot. The three rules come from three different Acts and notices, and they do not always agree.

One event, three taxes: twelve situations

Read across a row and the three columns rarely say the same thing for the same reason. The £150 test belongs only to the first column. The corporation tax and VAT columns do not care what the event cost; they care who it was for.

The £150 rule, in the Act

If there is one such event in the tax year, s.264(2): “no liability to income tax arises in respect of its provision if the cost per head of the party or function does not exceed £150”. If there are two or more, s.264(3): “no liability to income tax arises in respect of the provision of one or more of them (“the exempt party or parties”) if the cost per head of the exempt party or parties does not exceed £150 or £150 in aggregate.”

GOV.UK reduces this to three conditions. The party must:

Over the limit, the whole cost is taxable

If an event does not qualify, GOV.UK’s instruction is to “report on each employee’s form P11D pay Class 1A National Insurance on the full cost of the event”. There is no partial relief for the first £150. With two events, the order matters: “But you cannot do this if you’ve already used up the £150 exemption on another event.”

Travel and hotels count towards the £150

This is the line most planning misses, and it is the one that matters when an event is organised through a travel supplier:

Two consequences. The cost includes transport and accommodation for everyone attending, including partners and guests who are not employees. And the divisor is everyone attending, not only employees. An illustration:

At £90.00 the party looks comfortably inside the limit. Counted as the Act counts it, it is £165.00 a head — over £150, and so taxable in full. The hotel decision is also a tax decision.

Locations, departments and virtual events

• “If your business has more than one location, an annual event that’s open to all of your staff based at one location still counts as exempt.”
• “You can also put on separate parties for different departments, as long as all of your employees can attend one of them.”
• “This also applies to online or virtual parties.”
• “You do have to report how much social functions and parties are worth to each employee if they are a part of a salary sacrifice arrangement.”

Corporation tax: staff yes, clients no

The Corporation Tax Act 2009 starts with a prohibition:

It is wide. ““entertainment” includes hospitality of any kind”, and “the expenses incurred in providing entertainment or a gift include expenses incurred in providing anything incidental to the provision of entertainment or a gift.” So the taxi to the restaurant is caught along with the dinner. The main exception is staff:

That is why a staff party with a few clients invited is still deductible, but a client event with a few staff hosting it is not: the question is which provision is incidental to which. For these purposes ““employee” includes a director of the company and a person engaged in the management of the company”, so directors count as staff.

VAT: staff reclaimable, clients blocked

• Directors only: “If the entertainment is provided only for directors or partners of a business the VAT incurred is not input tax.”
• Directors with staff: “But where directors and partners of the business attend staff parties together with other employees, we accept that the tax is input tax and is not blocked from recovery.”
• Mixed events: “You can only recover as input tax the VAT you incur on entertaining your employees. The portion of the input tax incurred in entertaining others is blocked under the business entertainment rules.”
• Clients: “You cannot recover input tax incurred on the provision of business entertainment expenses.” HMRC lists people who are not employees for this purpose, including “pensioners and former employees job applicants and interviewees shareholders (who are not also employees)”.
• Overseas customers: “VAT incurred on the entertainment of overseas customers may be recoverable when incurred for the purpose of the business if it’s reasonable in scale and character.” But: “Hospitality provided because it would be polite, because it’s expected, or because it would improve relationships is not for strict business purposes.”

The directors-only rule is where the VAT and corporation tax answers diverge most sharply: the event is deductible for corporation tax, because directors are employees under s.1298, but its VAT is not input tax.

A planning checklist

• Budget the £150 on total cost including VAT, travel and hotel, divided by everyone attending.
• Keep the invitation list open to all staff, or all at a location.
• If there are two events, decide which one uses the exemption before booking the second.
• Keep client hospitality on a separate cost code: different corporation tax and VAT treatment.
• Treat directors-only dinners as VAT-irrecoverable.

How exempt items are kept off the P11D, and the payrolling changes from April 2027, are on P11D and business travel. VAT on the travel itself is on VAT on business travel. This page reproduces legislation and HMRC guidance as read on 2026-09-26; it is not tax advice.

Common questions