Tax rules on entertaining when there is a staff and client element
29th April 2016
Posted in Articles, Employment Tax, Featured Articles by Forbes Dawson
Existing rules
HMRC have a strict view regarding client entertaining with no tax deductions generally being allowed. This applies regardless of whether it is a casual drink at the pub or something more elaborate like a ball.
On the other hand, money spent on staff entertainment is usually tax deductible but can be a different story in practice. Staff entertainment is a taxable benefit in kind, and employers often pay the tax as it would be counter-productive for employees to be taxed on what is meant to be a ‘treat’. This can result in a Catch-22 as the tax benefits of this for employers are cancelled out.
There is however an annual tax-free allowance of £150 per employee (including VAT). The rules surrounding this dictate that the event has to be an annual affair (such as a summer barbecue or Christmas formal) and open to all employees.
‘Mixed’ entertainment
There may be instances in which ‘mixed’ client and staff entertaining events have been entirely disallowed for tax purposes. However, this would not necessarily be the case if expenses for the event can be isolated i.e. on a per head basis. For instance, Company A hosts an annual spa day, to which 50 clients and all 10 employees are invited to. The spa charges a corporate rate of £45 per head. As costs surrounding employees can be claimed, the employer should be claiming £450 (£45 x 10 employees) back on this.
The main disadvantage of this approach is that it eats into each employee’s annual tax-free allowance leaving £105 (£150 – £45). Nevertheless, the employer is better off than he was before when the entire event was disallowed. There can therefore often be an advantage in agreeing ‘per head’ deals with suppliers.
New tax-free allowance
With effect from 6 April 2016, employee benefits in kind are tax-exempt if they cost less than £50 per head. This tax-free exemption of £50 per head can be used in conjunction with the £150 limit to increase tax-free staff entertainment. Going back to the example above, Company A can claim the full £450 tax-free, leaving the £150 exemption untouched to put towards other events.
However be warned, if the individual benefit exceeds £50 (or an average of £50 per head), then the whole amount becomes taxable as a benefit in kind, so don’t go adding on that open bar to the New Year’s party just yet!
