Staff entertaining – debunking the tax myths

The tax implications of staff entertaining costs are often at the fore of tax discussions as employers consider their annual tax reporting requirements. But what are the key issues and misunderstandings?

PAYE settlement agreements (PSAs)
While items to be included in the PSA need to be provided to and agreed by HMRC by 6 July, and the income tax and Class 1B NIC payments need to be made by 19/22 October, HMRC can agree an additional deadline of the end of July (or even August) for provision of the assessments/calculations under the annual settlement.

This additional requirement is not set in legislation and HMRC has no real power to enforce this. However, if you do need more time to finalise your case assessment we would still recommend you advise HMRC of this and the date when the assessment will be provided by. You do not want to adversely affect your ability to agree a PSA in future years.

Annual functions
The £150 limit is generally known by employers, but it is worth exploring exactly what this applies to. The £150 is a per head limit for annual functions and not per employee. So when employees’ spouses and partners also attend the event you can budget for £300 per couple within the concession. The per head limit is also determined on attendees and not invitees, so employees dropping out late on could impact on the tax position of the event.

If the limit is exceeded then the whole cost of the event, and not merely the excess, is subject to tax and NIC.

The second part of the test is that it only applies to annual functions. So if you have a special event to celebrate the company’s 10th anniversary, this will not be covered unless you have had similar events in earlier years. Also, where you have more than one annual function in the year (e.g. Christmas Party and Summer Ball), if the total cost of both events does not exceed £150 per head both can be covered. However, if the cost per head was, for example, £80 at each event then only one would fall into the concession. The other event would be taxable in full. You can though choose which event on which to pay the tax.

The cost of the event will include standard costs such as function room hire, food and drink. Also included are taxis home, suit hire and any accommodation provided.

Entertaining group employees
In group structures, employees of one company will often incur costs in hospitality relating to employees of other group companies.

While there will be occasions where such costs can be treated as‘client entertaining’ (where the underlying trade with each other is on an arms-length basis), the majority of entertaining will be seen by HMRC as staff entertaining and so fall into the scope of the PSA.

Lunches provided on site
Many companies provide lunch at the office where staff  members attend meetings through their lunch break, and the tax rules can differ for each occasion of this.

When training events occur and attendance at the training event is made available to all staff then tax relief will generally be available. However, where the lunch meeting is attended by only certain employees (e.g. Directors’ Board Meeting) this would normally be seen as a taxable benefit.

Annual conferences
While these are less common than other events, they are typically more expensive so the tax impact of these can be larger.

Key issues considered by HMRC
  • Is there a business case for an external event – i.e. does the office have a room large enough to house the event? This is easier to support for more geographically diverse employers where it is difficult for staff to meet up normally.
  • Where the event is booked at a recreational site such as golf hotels, leisure resorts, amusement parks, etc. then HMRC may consider the business purpose to be incidental when compared to the social/reward element and are likely to review such events in greater detail.
  • Is there a specific training or business purpose for the event? Team-building events such as go-karting or clay pigeon shooting would not qualify, but where part of an integrated event can be considered as allowable expenses.
  • Does the business purpose of the event cover more than one day? If there is a two day event and day one has a business agenda but day two is entirely social or recreational, then the overnight costs could be considered to be taxable.
After the event, it is recommended that agendas, invites, etc. are retained as well as the invoices and receipts in case of a later HMRC enquiry.

It is often preferable when planning events to seek tax advice in advance as the costs of an inadvertent tax charge here can be considerable.

To download our factsheet click here. If you have any queries about any of the issues raised in our factsheet then please contact Moore Stephens’ Employers Consulting Group.

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