Entertaining - allowable for tax?
Newsletter issue – November 2022
The tax rules for entertaining businesses are clear. Whether payment for lunch with a customer or tickets for a sporting event -- whatever the reason, with few exceptions, any cost incurred for entertaining is not an allowable expense for tax purposes. The amount can still be paid out of the business bank account and deducted from arriving at the accounting profit but will be added back in the tax computation and taxed.
One of the exceptions to this rule concerns staff entertainment. Staff entertaining is allowable, so long as it is 'wholly and exclusively' for the purposes of the trade and is not merely incidental to entertaining customers. The 'rider' is that although allowable against tax for the business, this may give rise to a taxable benefit in kind on staff unless falling within the trivial benefits exemption. To ensure that no charge falls on employees, all employees (or all those at one branch or department) must be invited to the event and the total spend per head cannot be more than £150 annually. Any amount higher is a benefit in kind to the employee and tax will be payable on the total cost not just the spend above £150. A business will also be liable to pay Class 1A NI on the taxable amount if deemed a benefit in kind.
Businesses usually use this annual allowance for Christmas parties. However, it can also be used for other annual events such as a summer party. These events must be regular rather than 'one offs'. Companies with just one director/employee would find it hard to justify a £150 a head as tax-deductible however those companies with two or more directors would be able to claim. If the cost per head of two events together exceeds the limit (i.e. with one being £80 and the other being £90) only one could qualify for the tax relief, with the other being fully taxable.
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.
It hardly seems fair on the employee to be taxed on something that the business provides for enjoyment and therefore if the £150 limit is exceeded many employers pay any chargeable income Tax and NIC on behalf of their employees by entering into a PAYE Settlement Agreement (PSA) with HMRC. To obtain a PSA the business needs to write to HMRC describing the benefits and expenses to be covered. A single payment is made of the amount of tax and NIC due on a grossed up basis at the appropriate rate of tax. The deadline for applying is 5 July following the end of the tax year, tax is due by 22 October.
VAT to claim
Should a business want to host an event where both clients and employees can attend, the making of a small charge to non-employees will enable input tax to be claimed on related costs because 'free hospitality' is no longer being provided. However, it will mean that a small amount of output tax will be payable on the money received. For companies registered under the flat rate scheme, no VAT can be reclaimed.
Overseas customers
The situation is different for costs incurred on entertaining overseas customers/clients carried out at a reasonable scale, undertaken only for business purposes. This is because HMRC deems an overseas customer as someone who is not an ordinary UK resident or who performs business in the UK (including the Isle of Man).