Getting your staff entertainment costs right

Brian Rudkin

Brian Rudkin

Director and Head of Employer Services

24 July 2019

    Over the summer HMRC have focused on reviewing staff entertainment costs. They have issued letters to companies across the country where staff entertainment costs have been claimed as an expense in the business accounts or tax computations, but no corresponding benefits in kind have been reported on forms P11D or via a PAYE Settlement Agreement (PSA).

    For many businesses this can be a grey area, so it is helpful to remind ourselves some of the key points in relation to staff entertainment and what is taxable and not taxable.

    The basics of staff entertainment

    Generally, all entertainment of staff is taxable as a benefit in kind. This includes all social events such as drinks in the local pub, restaurant meals, sporting events, concert/theatre tickets, etc

    Such costs are reportable on forms P11D, with the employee paying the tax due and the employer responsible for the NIC charge, or the entertainment costs can be settled by the employer through a PSA instead on a grossed-up basis.

    There are some exceptions to this:

    • If the entertainment is an annual event (i.e. held every single year), open to all employees and the total entertainment costs per attendee is less than £150 a head (inclusive of all costs and VAT), these costs are specifically exempt and not reportable to HMRC. If the entertainment costs are less than £50 a head and satisfy the conditions to be a ‘trivial benefit’ (which include not being work related, contractual or a reward of any kind) then, again the costs are exempt from tax and NIC.For full details see HMRC’s guidance on expenses and benefits in relation to social functions and parties. 

    HMRC’s main focus is to ensure that taxable staff entertainment is being treated and reported correctly. However, they also want to ensure that businesses are not recording the entertainment of non-employees (such as customers, suppliers, business associates, etc.) as staff entertainment. Such entertainment should properly be recorded as client entertainment which would then disqualify the employer from obtaining corporation tax relief on the costs and would also be prohibited from recovering the VAT, which is not the case with staff entertainment.

    Have I done something wrong if I received a letter from HMRC?

    Not necessarily. There may be several genuine reasons why no corresponding benefits in kind have been reported on forms P11D or via a PSA.

    There may be a timing difference between the accounting year-end and tax year-end so that the amounts have yet to be reported by the time that HMRC issued their letter.[BR2] 
    The staff entertainment being exempt under the annual party rules. The costs being exempt under the trivial benefit rules.

    HMRC’s view is that a PSA is an indication that an employer takes its compliance responsibilities seriously and a lack of one may raise concerns that taxable items are not being reported. If HMRC are not satisfied with your response this could trigger an employer compliance review.

    If you have received a letter from HMRC or are unclear on your responsibilities, speak to a member of our Employer Services tax team who will be able to assist you.