Staff refreshments & working lunches

Conditions

1. A sole trader cannot claim food and drink for themselves under any 'staff refreshments' heading. There is no employer-employee relationship, and BIM37660 gives the reason directly: 'The cost of food or drink consumed for the human requirement of sustenance is not allowable'. The expenditure is 'at best dual purpose', and 'The whole cost is disallowed' — there is no apportionment for a business proportion or for the extra cost of eating away from home. Separate rules can allow a sole trader's own subsistence on itinerant trade journeys or alongside overnight business accommodation (BIM37670), but an ordinary lunch at the normal place of business is not one of them. Where a sole trader employs staff and provides them with reasonable refreshments during a working session, those costs are an allowable staff expense — but the trader's own share is not.
2. For a limited company, the entertainment disallowance (s45 ITTOIA 2005 / s1298 CTA 2009) applies to hospitality provided to clients and customers. Staff entertaining is a statutory exception (s46 ITTOIA 2005 / s1299 CTA 2009): BIM45033 states that 'Staff entertaining is allowable, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers'. Reasonable working lunches, tea, coffee and refreshments provided to employees during meetings and training days are therefore generally deductible for the company. Two limits survive the exception: the expenditure must still be wholly and exclusively for the purposes of the business, and HMRC considers 'excessive' entertainment provided to employees in the same light as 'excessive' remuneration.
3. Whether those same refreshments create a taxable benefit for the employee is a separate question from the company's deduction. The main relief is the exemption for free or subsidised meals in s317 ITEPA 2003, and EIM21670 confirms that 'The exemption applies to light refreshments as it does to meals'. It is conditional: EIM21671 requires that the meal is provided in a canteen or on the employer's premises, that 'the meal is on a reasonable scale and all employees, or all employees at a particular work location, may obtain a free or subsidised meal', and that the meals are 'not provided as part of salary sacrifice or flexible remuneration arrangements'. Where those conditions are not met, the trivial benefits exemption in s323A ITEPA 2003 may still cover modest provision, provided 'the cost of providing the benefit does not exceed £50' and its other conditions are satisfied.
4. The annual staff function exemption under s264 ITEPA 2003 applies to social events — Christmas parties, summer barbecues and similar — that are open to all staff (or all at a particular location) and recur annually. GOV.UK sets the figure as 'cost £150 or less per person'. EIM21690 confirms what goes into it: 'The cost of the function includes VAT and the cost of transport and/or overnight accommodation if these are provided to enable employees to attend', and the cost per head is found by dividing the total by 'the total number of people (including non-employees) who attend'. This is a threshold, not an allowance. EIM21690 is explicit that 'The figure of £150 is not an allowance', and that where a function falls outside the exemption employees are 'chargeable on the full cost per head, not just the excess over £150'.
5. The £150 aggregate applies across all qualifying functions in the year, but exceeding it does not make every event taxable. EIM21690: 'If the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt, the others taxable.' The exemption is applied to the combination of events that uses it best, and the remaining functions are charged in full. GOV.UK states the same rule from the other side — you may treat a cheaper event as exempt, 'But you cannot do this if you've already used up the £150 exemption on another event.'
6. One-off celebrations — an anniversary party, a leaving do, an ad hoc team dinner — do not qualify for the annual function exemption. EIM21690 defines the test: the general meaning of 'annual' is 'that it is something that happens once a year on a recurring basis and it follows from this that a one-off event, for example a party to celebrate a 25th anniversary, cannot be an annual party or function'. Such events may still be deductible for the company as staff entertaining, but the employee faces a benefit charge unless another exemption applies.
7. Virtual functions that are otherwise qualifying meet the exemption conditions. EIM21690: 'Where an annual function is provided virtually using IT then the exemption is capable of being met provided all other conditions are also satisfied'. GOV.UK puts it more simply — 'This also applies to online or virtual parties.'
8. Where an event is not exempt, the consequence is a reporting and National Insurance obligation for the employer as well as a tax charge on the employee. GOV.UK requires you to 'report on each employee's form P11D' and to 'pay Class 1A National Insurance on the full cost of the event'. BIM45033 notes that because the benefit is hard to assign accurately, 'many employers choose to include such items in a PAYE Settlement Agreement (PSA) and pay Income Tax and National Insurance contributions on behalf of the employees'.

Common mistakes

• A sole trader treating their own working lunch as 'staff refreshments' when there are no employees — the sustenance rule disallows the trader's own food regardless of labelling.
• A company holding a staff Christmas party at £160 per head and assuming the £150 exemption covers most of it — the entire £160 per head becomes a taxable benefit for employees, not just the £10 excess.
• Treating every team lunch as covered by the annual function exemption — the exemption is specifically for annual recurring social functions open to all staff, not for routine working meals, which are dealt with under the separate s317 ITEPA 2003 exemption.
• Assuming that going over £150 in aggregate taxes every event of the year. It does not: the functions that best use the £150 stay exempt, and only the remaining functions are charged.
• Forgetting that the £150 limit is cumulative across all qualifying events in the year. Two events at £80 and £90 per head aggregate to £170, so they cannot both be exempt — the £90 event is the one that best uses the £150, leaving the £80 event taxable in full.
• Counting only employees when working out the cost per head. HMRC divides the total cost by everyone who attends, including non-employee guests, which lowers the per-head figure.

What to keep

• For working lunches and refreshments: receipts and a note of the meeting, attendees, and business purpose. Where you are relying on the s317 exemption, keep evidence that the refreshments were available to staff generally at that location.
• For annual functions: total cost including VAT and any transport or accommodation, the total number of attendees including non-employee guests, the resulting per-head figure, evidence the event was open to all staff, and the date. Retain records showing the aggregate per-head cost across all qualifying events in the year.
• For any event that is not exempt: the P11D entries for each attending employee and the Class 1A National Insurance calculation, or the PAYE Settlement Agreement under which the employer settled the charge instead.

Real-world example

A limited company of eight employees holds weekly team meetings with sandwiches and drinks (about £7 per head, paid by the company). These are working meals during productive meetings — allowable for the company as a staff cost, and exempt for the employees under s317 ITEPA 2003 provided the refreshments are provided on the employer's premises, are on a reasonable scale, and are available to staff generally rather than to a chosen few. In December the company holds a Christmas dinner costing £120 per head. That is within the £150 annual function limit, so no income tax or Class 1A National Insurance arises. If the company had also held a summer barbecue at £40 per head, the aggregate would be £160 — over the limit, so the two cannot both be exempt. The £120 dinner is the function that best uses the £150, so it stays exempt and the £40 barbecue is taxable in full: £40 per head on each attending employee's P11D, with Class 1A National Insurance due from the company.

Frequently asked

Related allowances