NEWS
RESOURCES
Welcome to Softworks: Workforce Management, Time and Attendance
Business Lunches, Walking a Thin Line
The Tax Implications
Deductions
In completing Form P11D an employer is asked to certify, it they are a trading organisation (where a trade, business, profession or vocation is carried on) and that they have, disallowed all employee incurred entertaining expenses against their own tax computation.
With a trading organisation (including a nationalised industry) entitlement to a deduction from earnings for entertainment expenses cannot be determined solely by reference to the general rule for employees’ expenses, where ‘the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment’.
Consideration also has to be given as to whether the employer’s payment or reimbursement of employee expenses is disallowed in calculating the employer’s taxable profits. In other words, employees can claim tax relief on business entertaining expenses provided their employer is not receiving a corporation tax deduction in the company accounts for that expense.
Definitions
Business entertainment is defined in tax law and means entertainment (including hospitality of any kind) provided by a person, in connection with a trade carried on by that person. However, it does not apply to anything provided by the trader for bona fide employees unless its provision for them is incidental to its provision for others (business contacts). The term ‘incidental’ can be taken to mean that the primary purpose of the employer provided entertainment is not for its own employees.
As such, staff entertainment is not normally allowed in respect of ‘entertaining colleagues that is other employees of the same organisation’ (ie, persons working for the same group o companies). The word ‘normally’ appears to offer some leeway. For example, where the entertainment arises in response to a visit from head office officials to workers located at a subordinate office and the visit is necessarily conducted outside of normal working hours, this may be allowed on the grounds that this is not a normal occurrence.
Dilemmas
An employee is trying to gain an important order from a new client so he takes the client’s representative out for a meal at lunchtime. HM Revenue & Customs (HMRC) would regard such an occasion as business entertaining if the purpose was to discuss a particular business project. The expenses may also be allowable if the purpose was to maintain a business connection with an existing customer or supplier, or to form a new one, even though no business was actually done.
It is probably fair to say that where ‘local employees’ outnumber those from outside organisations, the less justifiable it is as business entertainment. The question is are all employees bringing something to the table (in terms of input to the business under discussion) or are they just taking something away from the table (with regard to the ‘free’ food and drink on offer). HMRC looks carefully at the entertainment of customers and clients, which are really an excuse for a ‘staff freebie’. Those attending must be necessary to the business occasion.
In contrast where staff members are called upon to host an entertainment event arranged for the employer’s customers or clients and the entertainment enjoyed by the staff members is ‘incidental’ to the provision for the employer’s guests, no tax liability would ordinarily arise on the employee. This could include a corporate golf day or box at a rugby match, although HMRC may challenge this claim if the employees’ spouses or families are in attendance.
Costs
If an employee expense deduction is allowable, the cost of providing the entertainment includes expenditure on anything incidental to the provision of the entertainment. For example, the cost of providing a taxi to the restaurant where guests are entertained counts as expenditure on entertainment. Where the expenses are incurred for genuine business reasons, there are no restrictions on the employee’s share of the costs of the particular occasion, such as their own meal.
No allowance can be given for entertaining personal friends or business acquaintances where there is no business obligation to entertain them. If employees of different companies have a reciprocal arrangement, in that they entertain each other on a regular basis, this expense is not allowable, even if some business topic ‘happens’ to be discussed.
Records
Employees who claim expenses for business entertaining (in order for a tax deduction to be given) ‘should be able to support the claim with reasonable records. The evidence should show the amounts spent on particular occasions, the nature of the entertainment, the persons entertained and the reason for the entertaining.’
The ‘necessity’ of business entertaining can be detailed by, where applicable, the pre authorisation given to the employee to undertake the entertaining or by the detail on any expenses claim form afterwards. HMRC will include business entertaining in any dispensation notice where the costs would be fully covered by an expense deduction. Some employees claim subsistence expenses that should more accurately be described as staff entertaining costs.
If there is a tax liability the costs should be apportioned among those in receipt of the entertainment and the amount declared on individual Form P11Ds. Where an individual employee picks up the bill and is reimbursed by the employer after submitting the appropriate expense claim, then if no further investigation is undertaken the employee will be taxed on the total expenditure, even though their part of the benefit was only a proportion of the cost. The employer should have sufficient detail on the expense report to be able to sub-divide the costs amongst all employees to whom entertainment was provided, where subsistence cannot be argued.
Alternatively, depending on the nature of the costs involved, employers may be able to agree a PAYE Settlement Agreement with their Tax Office to meet any tax or NIC liabilities instead of their employees.
Gifts and Parties
‘Entertainment’ includes expenditure on business gifts other than free samples of the trader’s own products. There is a limited tax exemption for the provision of business gifts that do not exceed £50 a year to any one person, contain a prominent advertisement or logo of the provider and is not food, drink, tobacco or vouchers exchangeable for goods.
Monday 30th August - Friday 3rd September 2010
Friday 5th November 2010
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