We’ve spent time in previous blogs understanding the treatment of entertainment expenses for the purposes of VAT. In this article, we discuss the treatment of entertainment expenses for the purposes of Corporation Tax and employment taxes.
Corporation Tax and employment taxes
Great news! Staff entertainment is an allowable expense for the purposes of corporation tax. This means that staff entertainment costs will reduce the amount of profits subject to tax. There is no limit to the amount of staff entertainment expenses that can be claimed so long as there is no other motive than to reward staff and boost morale.
There are a couple of catches however and they are as follows:
1. Owners are not staff and as such entertainment expenses incurred on them alone are not allowable expenses for the purposes of corporation tax. Before any entertainment expenses can be claimed staff need to be present at the event. When present there is no restriction on the expense that can be claimed
2. Staff are liable to pay income tax on any benefit received and on top of that employers are liable to pay class 1A NIC contributions on benefits in kind. These expenses are taxed at their gross amount including VAT.
Thankfully HMRC allows up to £150 per member of staff, per annum for annual events before any income tax or national insurance charges will apply. However if you go even just £1 over the £150 allowance the whole amount becomes taxable.
Is it worth the trouble?
So now we know the rules and the pitfalls the only question is, how can we make the administration of staff entertainment expenses as easy as possible?
The first thing to note is that there are a number of exempt expenses that do not need to be declared as a benefit and these are as follows:
- Business travel
- Phone bills
- Business entertainment expenses
- Uniforms and tools for work
*To qualify for these exemptions you must be paying a flat rate to your employees or reimbursing their actual expenses.
In addition, rather than cataloguing every coffee and sandwich purchased over the year and declaring it on a P11D, a business can make a PAYE Settlement Agreement (PSA) where they make one annual payment to cover all tax and national insurance due on minor or irregular benefits.
Client Entertainment… No Nirvana
As a rule client entertainment is not an allowable expense for the purposes of Corporation Tax and VAT.
Staff entertainment expenses are an allowable expense for the purposes of Corporation Tax. There is no limit on the amount of staff entertaining expenses that can be claimed against taxable profit providing that the expenses are incurred for the benefit of the business, for example as a reward for the achievement of milestones or to boost morale.
However business owners beware, staff entertainment expenses are in theory subject to Income Tax and Class1A national insurance when business owners exceed the £150 per head per annum allowance.
If you have any questions about Corporation Tax and employment taxes please feel free to get in touch with our team.