Staff updates are an annual occurrence for many employers. They often take place in the summer, off-site away from the employer’s business premises, require compulsory attendance by employees, and typically involve employees being updated on matters such as financial results and business strategy. Employees may participate in team building exercises and breakout sessions at the event, and it may also incorporate other recreational activities which have the purpose of rewarding or motivating employees.
The overall cost met by the employer can include a variety of costs including (but not limited to) the cost of venue hire, travel, subsistence, activities, and overnight accommodation.
What should employers consider for employment tax and National Insurance contribution purposes?
In our experience, most employers hold these events for a genuine underlying business purpose. In many of the cases we see, employees’ attendance is compulsory with much, if not all, of the content of the event representing work related training.
However, there are often activities at these events where the purpose is not wholly attributable to an underlying business purpose and does not represent work related training. This might include activities where the purpose is to motivate, reward, or incentivise employees, or where the activity relates more to entertainment or recreation.
The issue for employment tax and National Insurance contibution (NIC) purposes, therefore, is that expenditure at these events on activities which are attributable to recreation or staff entertainment, or to incentivise or reward staff, can give rise to benefits in kind which are taxable and liable to NIC.
Is this something that HMRC check?
Yes, it is. We are regularly seeing HMRC investigate staff update events during compliance checks of employer records. HMRC typically requests a breakdown of the cost of the event, along with confirmation and evidence of the underlying business purpose including, for example, copies of the agenda and itinerary.
HMRC will also seek confirmation that expenditure on recreational activities at the event, or those activities which seek only to motivate or incentivise employees, has been properly identified and reported to HMRC where necessary, in a way which allows the tax and NIC due on the benefits arising to be paid to HMRC.
What steps can employers take to apply the correct treatment?
In our experience this is an area of employment tax compliance which many employers struggle to get right.
Employers must be fully aware of the tax and NIC implications when planning these events as the cost of any additional tax and/or NIC payable to HMRC is an additional cost to be considered when agreeing a budget.
Furthermore, employers must ensure that they have arrangements in place to meet their employment tax and NIC obligations for such events to avoid compliance inaccuracies and exposure to unexpected tax and NIC liabilities, including potential HMRC penalties.
Employers should therefore properly assess the underlying reason for holding each event to identify whether there is a genuine training purpose and, where there is, they must retain evidence which supports that purpose. That might include communications with employees about the event, the names of attendees and guest speakers, the agenda, copies of presentation slides and other materials etc.
Where the primary purpose of holding an event is to reward, incentivise or motivate employees, or the purpose is attributable to staff entertainment or recreation, the entire cost of the event (including incidental costs such as travel and overnight accommodation) may give rise to benefits in kind which are taxable and liable to NIC.
Even where there is a genuine business purpose for holding an event, there may still be expenditure which is connected to rewarding or incentivising employees, or to the provision of recreation or entertainment, which generally gives rise to benefits in kind which are taxable and liable to NIC. In such circumstances there is a need to identify this expenditure and ensure that the benefits in kind arising are reported to HMRC. Examples of such expenditure might include the cost of evening staff drinks met by the employer, or the additional cost of a purely recreational activity which takes place during the event. It should however be noted that where team building activities are included as part of an event, including leadership and team skills which are appropriate for the employees concerned, these may well qualify for exemption.
Where expenditure at these events does give rise to benefits in kind, that cost (which should include the cost of attributable VAT) must be reported to HMRC to enable the tax and NIC due to be paid. Typically, most employers will meet the cost of the tax and NIC due on a grossed-up basis through the operation of a PAYE Settlement Agreement (PSA) with HMRC.
Should employers take professional advice?
The employment tax and NIC treatment of these events can be complex, with certain aspects of the rules being open to interpretation. This, combined with HMRC guidance which is difficult to navigate, can make compliance with the employment tax and NIC rules a challenging exercise for many employers. There is plenty of scope here for employers to reach the wrong conclusion, or not to keep suitable records which substantiate the business purpose of an event.
Exercising reasonable care by taking professional advice, and keeping a record of any advice taken, is an effective way of managing risk and mitigating exposure to what can be significant potential underpaid liabilities where events have taken place over several years.
RSM’s employment tax specialists have significant experiencing of considering the employment tax and NIC treatment of these events. If you have any questions regarding the above, or any concerns about being compliant, please contact Lee Knight, David Williams-Richardson or Deborah Parks-Green.