The tax treatment of entertainment expenses can be a complex area, particularly when looking at the distinction between staff entertaining and business entertaining. Here we take a look at some of the basics.
Expenditure on staff entertaining can cover a range of items, from clearly defined events such as the Christmas party to those which may be overlooked, such as an employee lunch. Such expenditure will generally fall into one of three categories in terms of the employee’s personal tax position:
1) Exempt benefits
2) Trivial benefits
3) Taxable benefits
The most important exemption for staff entertaining is for “annual parties and functions”. Under this exemption, annual events, such as the Christmas party or summer barbeque, do not give rise to a taxable benefit for the employees, provided certain conditions are met:
a) The event is open to all employees or all employees at a particular location
b) The cost per head does not exceed £150
In calculating the cost per head, the total cost of the event (venue hire, catering, entertainment, transport etc., plus any VAT on those costs) is divided by the number of attendees, not just employees. If more than one annual event is held during a tax year then, provided the aggregate cost per head of all events is below the limit, they are all exempt from tax.
But if the aggregate should exceed £150 per head, then the event that takes the cost over the threshold is taxable in full. For example, if the practice holds three events, two of which cost £70 per head and one costs £20 per head, then the smaller event would be a taxable benefit.
Some modest amounts of staff entertaining may not be taxable on the employees on the basis that they are “trivial benefits”. Unlike the exemption for annual events, this is not currently a statutory exemption but Revenue practice, although it is due to be put onto a statutory footing soon. HMRC give guidance on what might be considered a trivial benefit:
> Refreshments, such as tea, coffee and water, provided to staff (if provided to all staff this is covered by a statutory exemption, but if provided to only some staff it should be considered trivial).
> Small gifts in recognition of a particular event (such as flowers for a wedding or birthday).
> Seasonal gifts, such as a bottle of wine or box of chocolates at Christmas
There is no monetary limit set out in the law, and it is the cost per employee not the total cost to the employer that is considered. However, it is expected that the statutory exemption, when introduced, will be £50 per person, and this could be used as a guide. HMRC will look to tax items viewed as a reward as opposed to those related to staff welfare.
Any staff entertaining that does not fall under a statutory exemption and which would not constitute a trivial benefit is taxable on the employees as income. This includes working lunches, staff socials and events not classed as ‘annual’.
Mainstream law prescribes that the benefits must be reported on a form P11D for the employees concerned, and each employee will pay tax on their share.
Often, this is not a desirable outcome, either because of the practicalities of apportioning the costs between employees and the subsequent form filling, or because it would undermine the goodwill generated by providing the entertaining if the employees are then lumbered with a tax bill.
Thankfully there is an alternative, known as a PAYE Settlement Agreement (PSA). This is where the practice agrees with HMRC to pay the tax and National Insurance on behalf of the staff (calculated on a grossed up basis). A PSA can be put in place to cover benefits which are minor, irregular or impractical to apportion, and we have seen a wide range of items agreed by the Revenue.
The cost of staff entertainment will generally be an allowable (i.e. tax deductible) expense for the practice, irrespective of the personal tax treatment for the staff involved, on the basis that it is part of the cost incurred in employing the staff.
Many readers will be aware that, unlike staff entertaining, tax law prohibits tax relief being claimed for the cost of business entertaining in calculating the taxable profits of the practice. If the attendees at a staff party or function include clients, suppliers or anyone else who is not a member of staff or their partner then the cost related to those attendees should be adjusted in the tax computation.
Where an employee is involved in business entertaining, that should not constitute a taxable benefit, provided the event has a clear business purpose and the employee’s attendance forms part of their role. This will be the case even though the employee may enjoy some of the entertainment laid on by the practice, as that would be seen to be incidental to the primary business objective.
On the other hand, if an event lacks a business objective, or perhaps the employee’s attendance is an incentive or reward, then HMRC are likely to view it as a taxable benefit.