How to budget for entertaining (and avoid a tax penalty)

Don’t entertain a tax penalty – be budget aware   

When it comes to entertaining clients or rewarding staff, you want everyone to have a great time, even if your budget doesn’t stretch to a ticket to the Euros or a trip to the Olympics. Whatever you choose, a day at the races or a show at The Festival, allowable deductions could make your budget go further.

Corporate Entertaining

Expenditure on corporate entertaining is not an allowable deduction for tax purposes whether you are a sole-trader, partnership or a limited company. This includes the expenditure that is incidental to the business entertainment. HMRC classes entertainment as ‘business entertainment’ when it is provided free of charge to people who are not employees of the business.

Staff Entertaining

Staff entertaining is an allowable deduction for tax purposes if you are rewarding staff for good work and to boost morale.  However, be aware there are certain conditions that must be adhered to:

• The function is an annual party
• The event is available to all employees in the business, or all employees at one location where the employer has multiple locations
• The cost per attendee does not exceed £150 including VAT

The exemption is an all or nothing exemption.  This means that if the party cost is £150 per head or less, it is exempt.  If is over £150 per head, then the whole cost of the party is subject to tax and NIC.  There is no ability to exempt the first £150 and pay tax and NIC on the excess.

If the employer holds more than one event, then there is no taxable benefit if the aggregate of the two events inclusive of VAT are less than £150 per head.  If the two events exceed the £150 exemption, then one party may meet the exemption while the other will be a taxable benefit.  The exemption can be used against the party that costs the most, provided this is less than £150 per head, leaving the smaller event as a taxable benefit.

PAYE Settlement Agreement (PSA)

Some employers may seek to pay the tax and NIC on behalf of their employees if the function provided goes over the £150 exemption.  This is typically done through a PAYE settlement agreement (PSA).  The benefit is then grossed up for tax and NIC purposes and the employer will settle the liability. However, this can be a costly exercise.

As you can see from the examples in the image, employers hoping to reward staff with a day at a premier sporting event will need deep pockets. As costs for entertaining rise, perhaps this allowable deduction limit needs to be reviewed.

If you need advice on this issue, please email our experienced tax team at tax@thomsoncooper.com.