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Staff Entertaining Costs: What Are the Tax Implications?

This blog provides a comprehensive overview of the current guidelines for recording staff entertaining costs and the tax implications..

Marie
03/06/2024

Planning a staff incentive trip to Ibiza? Or an extravagant night out with the team? Before you go any further, it’s crucial to understand the tax implications. These considerations might make your planned trip more expensive than anticipated.

In the competitive world of recruitment, providing incentives is paramount to attracting and retaining team members. They play a vital role in creating a positive working environment, boosting motivation, and building a cohesive team.

Properly managing and recording staff entertaining costs is essential for compliance with HMRC regulations. Ignoring these can lead to HMRC investigations or complications during the due diligence process if you plan to sell your business. This blog provides a comprehensive overview of the current guidelines for recording staff entertaining costs.

Annual Events

Annual events, such as Christmas parties or summer barbecues, are common forms of staff entertaining. According to HMRC, companies can spend up to £150 per employee per year on such events without incurring a tax charge. Here are some key points to consider:

  • The £150 limit is an exemption, not an allowance. If the cost per head exceeds this amount, the entire expense becomes taxable.
  • The event must be available to all employees to qualify for the exemption.
  • The exemption also applies to virtual events​

For instance, if your recruitment firm hosts a Christmas party costing £100 per head. This falls within the £150 exemption, so there are no tax implications. If the cost were £160 per head, the entire amount would be taxable.

Consider another scenario where your firm hosts three annual events in a year: a quiz night costing £20 per head, a summer social costing £100 per head, and a Christmas dinner costing £45 per head. Since events that exceed £150 threshold are fully taxable, not just the excess, it’s advantageous to find the right combination of events to stay within the threshold and utilise as much of the allowance as possible. For instance, you could group the summer social (£100) and the Christmas dinner (£45) within the £150 limit, ensuring only the quiz night costing £20 per head would trigger a tax charge.

Trivial Benefits

For smaller, more informal gatherings or rewards, the trivial benefits exemption is useful. This can cover things like a birthday team lunch or drinks after work.

To qualify as a trivial benefit:

  • The cost must not exceed £50 per employee.
  • It cannot be cash or a cash voucher.
  • It must not be provided as part of the employee’s contractual obligations.
  • The benefit must not be a reward for work or performance.

Directors of close companies (a limited company run by 5 or fewer shareholders)  have an annual cap of £300 on trivial benefits​.

Regular Staff Entertainment

When the average spend on regular staff entertainment exceeds £150 per person, HMRC considers this a benefit to the employees, subjecting it to tax and National Insurance contributions. There are two main methods to record this benefit:

  • P11D Form: This form is used to report expenses and benefits provided to employees. The reported benefits are then taxed through adjustments to the employees’ PAYE codes.
  • PAYE Settlement Agreement (PSA): This agreement allows the employer to settle the tax and National Insurance on minor, irregular, or impractical benefits on behalf of their employees, preventing unexpected tax charges for the employees.

It’s important to note that when employees entertain clients as part of their employment duties, no taxable benefit arises.

P11D Form

Any benefits that don’t fall within exemptions can be reported on a P11D form for each employee. The employee is taxed on this benefit, and in most cases, the tax is collected via an adjustment to their PAYE coding notice. Additionally, the company must pay Class 1A National Insurance on the value of the benefit at a rate of 13.8%.

The critical question here is whether you’re comfortable with your staff being taxed for being entertained by your company. If yes, this is the most cost-effective solution for the company, though employees might be unhappy with the unexpected tax bill.

Find out more about P11Ds in here: Why recruitment agencies need to complete P11D forms or download our P11D checklist.

PAYE Settlement Agreement (PSA)

If you prefer that your staff not be taxed on the entertainment provided by the company, you can enter into a PSA. This arrangement with HMRC allows the employer to cover the tax costs that employees would otherwise incur.

A PSA is obtained through a written request to HMRC, and the reporting is handled after the end of the tax year. The request should be submitted as soon as possible and can carry forward from one year to the next. Once HMRC accepts the request, a report needs to be made by 5 July following the relevant tax year, and the tax must be paid by 22 October.

For example, consider a significant company-funded event, such as a trip to Las Vegas, the tax implications if reported on a PSA could be as follows:

Benefit in Kind (BIK): Assume the trip cost £15,000, and all involved are 40% taxpayers.

Grossing Up: Gross up £15,000 by 40% (i.e., divide by 0.6) to account for tax: £15,000 / 0.6 = £25,000.

Tax Calculation: 40% tax on £25,000: £25,000 x 0.40 = £10,000.

National Insurance Contributions: Class 1B NI at 13.8%: £25,000 x 0.138 = £3,450

Total tax and NI due: £10,000 + £3,450 = £13,450, amounting to almost 90% of the original cost.

If basic rate tax payers were benefiting from the trip then the total tax and NI due would be slightly lower at £6,337.50, amounting to 42% of the original cost.

As you can see, these tax charges can be quite considerable and need to be taken into account when planning such trips or offering high-end rewards to your team.

Record Keeping

As an employer under the self-assessment regime, you are expected to understand the rules around staff entertaining costs and maintain sufficient records to report these matters to HMRC. The reporting process occurs once a year, immediately after the end of the tax year (5 April).


Contact Us:

Contact Recruitment Accountants today for support with staff entertaining costs and any other tax, accounting or financial business advice.

You can email us at hello@recruitmentaccountants.com or call us at 0845 606 9632 to speak with one of our experts.

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