Tax Implications for Entertaining Staff & ClientsBack
With Christmas parties now in full swing now seems like the perfect time to remind you of the rules and regulations when entertaining your staff and clients.
Entertaining your Staff
HM Revenue & Customs state that ‘staff entertaining is allowable so long as it is wholly and exclusively for the purposes of the trade.’ Any costs associated with entertaining employees including food, drink, hotel accommodation, taxi fares and entertainment are allowable business expenses. There is no limit so long as it is all for the benefit of the business. The most common event is the Christmas party but other instances with the aim of boosting staff morale and team building such as celebratory meals following a big contract win and occasional lunches and drinks after work are allowable.
Whilst there is no limit, employees are liable to pay income tax on any benefit arising from their employment and the employers liable to pay National Insurance. The good intentions of the employer entertaining their staff can be undone when the employees receive a tax bill. There is the option of a PAYE Settlement Agreement (PSA) which enables the employer to pay the tax and National Insurance on behalf of the employees.
There is also a £150 per tax year threshold under which no benefit in kind tax charge arises on the employee and exempts the employer from having to pay National Insurance. This only applies to annual events such as a Christmas party or summer ball and they have to be open to all staff so a managers only event does not qualify. The £150 per year per employee limit can be spread across multiple annual events so long as the aggregate cost is less than £150. If one event costs more than £150 then the exemption does not apply.
Entertaining Clients and Business Contacts
Any entertaining of clients, potential clients and business contacts is not tax deductible. Whereas we have already stated that staff entertaining is allowable for the purposes of the trade if those employees are in effect hosting the entertaining of a client or a potential new client the full cost is not allowable. However if the employee is carrying out that duty as part of their employment then there is no taxable benefit on them. To calculate taxable profits, the cost of client entertaining is added back to your net profit and the tax due is then calculated on the higher figure.
Reclaiming VAT on Entertaining
The VAT rules are pretty much the same in that you can’t usually reclaim input tax on entertainment except if it is for your staff.
If your Christmas party is predominantly for your employees but non-employees attend then VAT can be claimed for the percentage that relates to the percentage of employees at the event. For example, if there are 15 employees and 15 non-employees at your event, you can reclaim 50% of the input tax. On the other hand, if the event is principally for entertaining clients and potential clients then no VAT can be claimed, even if employees are in attendance.
Click here for detailed guidance on VAT and business entertainment