18 November 2023
Businesses may regularly entertain clients, customers or suppliers (business entertaining), as well as having staff events (staff entertaining). Often events might involve both employees of the business and external guests. HMRC is taking an increasing interest in how organisations treat business and staff entertaining.
From an employment taxes point of view, entertainment gives rise to a tax liability or restriction of tax relief unless a specific exemption applies.
Is business entertaining a benefit in kind?
Subject to specific exemptions discussed below, business entertaining is a taxable benefit on employees that attend such events (reportable on form P11D) unless a deduction for the expenditure is disallowed in calculating the employer’s taxable profits. Broadly, tax deductibility for the employer business depends on the nature of that business and the purpose of the entertainment.
For there to be no taxable benefit on the employee, the entertainment must be business-related. This means that the purpose of the event should be to discuss business or a business project, or to maintain or expand business connections. Entertainment provided as a form of reward to an employee at a business entertaining event is taxable on the employee. HMRC will look closely at who attended each event and whether or not they were there for a genuine business reason.
In summary, whilst there are exceptions, in most cases business entertaining costs can either be deducted by the employer in calculating taxable profits and taxable as a benefit in kind on the employee(s) in attendance, or the employer gets no tax relief on the expenditure and no benefit in kind charge arises on the employee.
Is staff entertaining a benefit in kind?
Entertaining provided to employees is a taxable benefit in kind unless an exemption applies. This includes social functions, staff events and parties. Employers often choose to include costs related to staff entertaining on a PAYE settlement agreement (PSA), settling the tax on behalf of their employees and paying employer’s Class 1B National Insurance contributions (NICs) due, rather than the employees having to pay the tax themselves.
We highlight below the main misconceptions regarding staff entertainment and events, and the key considerations for benefit in kind reporting which should not be overlooked.
Staff annual events
Staff annual events may qualify as a tax-free benefit. To do so, an event must:
- be open to all employees, meaning that a party for directors only (unless all staff are directors) does not qualify for exemption because it is not open to all employees, but separate events for different departments can still qualify, provided that all employees have the option of attending at least one of them;
- be an annual event that takes place once a year on a recurring basis;
- not be provided under salary sacrifice arrangements; and
- cost no more than £150 (including VAT and related costs such as travel and overnight accommodation met by the employer) per attendee.
If the cost of a staff event exceeds £150 per attendee, the whole cost (subject to understanding who the attendees are for reporting purposes etc) is subject to tax and NICs. The exemption can be used to cover more than one event, provided that the £150 limit is not exceeded in a tax year and all other conditions are met.
Conferences and away days
Often employers hold away days or conferences for employees. Employers should keep a detailed breakdown of costs and consider carefully the nature of the event and business content. HMRC has been known to ask for agendas, copies of papers and details of the reason for employee attendance.
While it is considered acceptable by HMRC for an employer to pay for a meal for its employees under the travel and subsistence rules where they are away from their normal place of work for such events for a business reason, it is necessary to consider whether these costs are reasonable. For dinner this might include food and drink taken at the same time, but drinks later in the evening are likely to be a reward for service and treated as staff entertaining rather than subsistence. Therefore, the cost attributable to such drinks should be reported on P11Ds or on a PSA.
Employers should therefore keep an accurate itemised record of these costs and ensure they are reported correctly.
Events attended by both staff and clients
Employers often consider excluding an event, such as a dinner attended by employees and clients, from their PSA calculations on the understanding the entire cost can be excluded under the business entertainment rules. However, it is necessary to consider the reason for the event and the requirement for employees to attend. It may be that costs need to be split between their business entertaining and staff entertaining elements.
Having robust policies in place to differentiate between business entertainment and staff entertainment, as well as keeping appropriate records as per HMRC’s guidance (see below), will help employers in this regard.
Concerts or sports events
HMRC often looks closely at this kind of entertaining. In order for there to be no benefit in kind for the employees attending such events with clients, the entertainment should be business-related, and attendance by the employee must be necessary. This means that the purpose of the event must be to discuss business or a business project, or to maintain or expand business connections. A good example can be seen at HMRC employment income manual EIM21729.
Reciprocal entertaining between business acquaintances, even though some business topic happens to be discussed, may often be for social and not business reasons and, if so, this expenditure is not allowable in calculating the employer’s taxable profits and is taxable on the employee.
Employer record keeping
Employers must keep records relating to benefits in kind for at least three years after the end of the most recent tax year to which they relate. This includes expenses records and evidence supporting a particular tax treatment.
For more information, please get in touch with Susan Ball, Lee Knight or your usual RSM contact.