How to Stay Safe from HMRC
28 November 18 | By: Jas Jhooty
Most employers are involved in paying entertaining costs in one form or another. These costs are treated differently for tax purposes depending on who is present at the entertaining event.
What is entertaining?
HMRC say that entertaining is providing free or subsidised hospitality. Here are examples that they provide of what can count as entertaining: -
For entertaining to be allowable for Income Tax purposes there must be non-employees of the business in attendance and there must be a genuine business reason for the expense. These types of costs are identified as Business Entertaining and are added back to profits as these are disallowable costs for UK corporation tax (CT) and also the corresponding VAT element of such costs cannot be reclaimed.
An exception to the business entertaining rule concerns the entertainment of employees. Staff entertaining is allowable for CT (and the corresponding VAT element can be reclaimed) but these costs are taxable on the employee for Income Tax purposes.
However as most employers are aware, not all staff entertainment is taxable by virtue of the Christmas Party and Annual Functions exemption allowing up to £150 (including VAT) per annum spent on such events to be tax-free.
For all other types of staff entertainment income tax is chargeable on the employee on the costs of the benefit. As most employees would not be best pleased to learn that they have to pay tax on the cost of the drink that their boss bought them in the pub, most employers settle the tax due on staff entertainment costs by way of a PAYE Settlement Agreement (PSA).
It is very important to correctly identify the attendees of entertaining events. This is because only the staff proportion of any entertaining costs can be reclaimed for VAT purposes. As a rule employers must obtain full details of: -
Employers should have stringent policies to ensure that these details are being captured efficiently. It is not good practice to allow employees to merely scrawl barely legible names on the back of a restaurant bill.
Mixed use entertaining
Sometimes employers may entertain employees and non-employees, for example where the employer allows employees to bring guests to staff parties and outings without making a charge. When this happens the employer can only recover as input tax the VAT incurred on entertaining employees.
So if an event is held which is attended by roughly equal numbers of employees and guests only 50% of the input VAT can be recovered.
Bribery Act implications
The Bribery Act 2010 was introduced to update and enhance UK law on bribery. When this legislation was first introduced many companies were understandably concerned about the implications of this act on their normal entertaining practices. Fortunately the Ministry of Justice issued a guide that confirmed that normal business entertaining costs would not be covered by the Bribery Act as long these costs were reasonable and proportionate for the business.
Most gifts given to non-employees would fall into the category of Business Entertaining. There are exceptions from this general rule. If any of these exceptions apply, the expenses incurred in providing the gift are deductible from trading profits. The exceptions are where:
Reporting entertainment costs
In the absence of a P11D dispensation employers must identify and report entertainment costs on employees’ P11D forms. Employers also have to identify the type of entertaining but putting a “tick” in the corresponding P11D box if the costs were associated with business entertaining and a “cross” in the corresponding P11D box if the costs were associated with staff entertaining. The “tick” and the “cross” quickly indicate to the taxman whether these costs would be disallowed for UK CT purposes. Staff entertainment must always be reported unless the employer has entered into a PSA with HMRC to settle the tax due on these costs.
How emTax can help?
It is very important that you identify entertaining costs correctly. As we have illustrated in this short summary, entertaining is quite a complicated area of tax legislation with differing tax consequences depending on the type of entertaining. You should ensure that your record keeping in this area is more than adequate to fend off any potential enquiries raised by the taxman.
Our consultants have all worked for HMRC and can undertake a dummy audit on your current systems to test their efficacy. We can also advise on how to improve your policies and systems to bring them up to scratch.
We can also help you to explain the above complicated rules by updating your expenses policy to incorporate an entertainment guide.
For more information on this or any other employment tax service do not hesitate to contact us.