HMRC only allows tax relief and the claiming of VAT on the cost of entertaining your business’s employees. The first question that needs to be resolved is to determine who are your employees? Former and previous employees don’t qualify, nor do subcontractors or shareholders who do not work in the business. If you’re a sole trader, partner in a partnership or LLP or director you are not classed as an employee and hence cannot claim tax relief or VAT on the cost of entertaining.
Corporation tax on staff entertaining
Staff entertaining is tax deductible within the business accounts, whereas business entertaining is not.
VAT on staff entertaining
VAT suffered on staff entertaining is recoverable on the basis that the purpose of the event is to entertain employees. If there is a mix of staff and client entertaining then the company can only reclaim to the extent the costs are applicable to staff. Please note, however, that if your employees are acting as hosts to a group of clients then this counts as business entertaining and hence no tax relief or VAT deduction available.
What benefits of staff entertaining can incur tax?
When a business entertains employees, this may be allowable for tax relief in the business accounts, but it could also be a benefit on which employees have to pay some tax. There are certain tax free entertaining benefits in relation to an annual event such as a Christmas party or summer barbeque, such events must be open to all staff and cost in total less than £150 per head per year (including VAT and extra costs such as travel/accommodation). It is important to note that the £150 is a limit and not an allowance (i.e. £151 per head would ensure the whole benefit is taxable).
Should the entertaining costs exceed the £150 limit per head, the employer will need to report the costs to HMRC. There is a choice in how they deal with such benefits, they can either include this within a P11d per employee or apply to HMRC for a PAYE Settlement Agreement (PSA). A P11d requires the company to pay Class 1A National Insurance Contributions on the benefit, and in addition the employee will be liable to pay the corresponding income tax liability through payroll. Alternatively, where the company applies to HMRC for a PSA, the company itself is liable for the Income Tax and National Insurance Contribution payments.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.