Is staff entertaining a regular cost for your business?

26 March 2018

If the answer to that question is yes, you’ll want to continue reading, as you, or more importantly, your staff, may be slapped with an unwanted tax bill from HMRC.

Under the current rules a company can spend £150 per employee, per year, on annual staff events, such as a Christmas party or summer barbecue, without the company or the employee suffering tax charges. Where the average spend exceeds £150 per person attending such events, HMRC will assess the attending employees as having received a benefit from the company and that benefit is subject to tax and National Insurance charges. In addition, one-off and informal events may fall under the taxman’s gaze and give rise to tax charges. However, where employees entertain clients as part of their employment duties, no taxable benefit to them arises.

Another helpful concession is HMRC’s revised attitude to trivial benefits in kind, which are treated as being non-taxable as long as they:

  • Cost under £50 per employee to provide
  • Are not cash or a voucher
  • Are not a performance reward
  • Are not provided under an employment contract
  • Are not a salary sacrifice

There is a further restriction for directors and the annual value of their trivial benefits must not exceed £300, otherwise they become taxable.

As an employer in the self-assessment regime, you are expected to understand these rules and keep sufficient records to be able to report such matters to HMRC. The reporting process occurs once a year, immediately after the end of the tax year (5 April).

Let’s assume you spend more than £150 per employee, per year on annual events and also go down the pub most Friday evenings for that essential debriefing session, what are your options?

The first problem is identifying what are annual events and what expenditure may qualify as being a trivial benefit. The annual events may be quite easy to spot and, if there are a few of them, it may be worthwhile juggling them to see which of them breaches the £150 per head limit, because events that breach the threshold are fully taxable, not just to the extent that the £150 limit is exceeded. For example, for 3 annual events in a year in chronological order, costing £20, £100 and £35 per head respectively, it will be better to include the £100 and £35 events within the limit, with only the £20 event triggering a tax charge.

The second problem is knowing how many employees were in the pub on, say, the 4th Friday in April last year and which of the company directors were there? The cost is easy, as it’s probably on the company credit card. The best you can do is make a reasonable estimate and eliminate any of the directors who were either on holiday then or are notoriously anti-social and never turn up to the pub.

For future trips to the pub and similar ad hoc outings, it will be worth making a note of the numbers attending, including noting directors present, although that may be better done at the start of the evening, rather than the end, when things may be a little blurred!

Forms P11d

Any benefits that don’t fall within the exemptions can be reported on a form P11d for each employee. The employee is taxed on this benefit and in the majority of cases, tax is collected via an adjustment to an individual’s PAYE coding notice. The company will also be expected to pay Class 1A National Insurance on the value of the benefit at a rate of 13.8%.

The question you have to answer here is ‘Am I happy with my staff being taxed on being entertained by my company?’ If the answer is yes, this is the cheapest solution for the company, although the employees may be a little upset by the unexpected tax bill.

PAYE Settlement Agreement (PSA)

If, like many employers, you do not want your staff being taxed on you entertaining them, you can enter into a PSA. This is an arrangement with HMRC whereby the employer agrees to settle the taxes due. In other words, the employer suffers the tax cost the employee would otherwise have suffered.

The calculation of any taxes due is a little too complex for this article but it’s fair to say this is a more expensive solution for the employer. Is that an acceptable price to pay for staff happiness?

A PSA is obtained by way of a written request to HMRC and reporting is dealt with after the end of the tax year. A request should be put in as soon as possible and can carry forward from one year to another. Once HMRC has accepted the request, a report needs to be made by 5 July following the tax year to which it relates and the tax needs to be paid by 22 October.

If you would like to discuss any of the points raised, please contact myself or your usual UHY adviser.