It’s Christmas and many businesses are throwing parties for their staff or using the festive season as a time to entertain clients, now is a good time for a reminder of the implications of paying for food and drink through your business.
There are certain tax, National Insurance (NI) and reporting obligations to be aware of so we’ve put together some broad principles to help guide you. The rules are complex and this is a simplified guideso please get in touch if you are unsure of the tax implications of a particular expense.
Common to all expenses is the rule that they must be wholly and exclusively business-related. This means that any non-business element must always be added back for income tax and VAT purposes and may have a PAYE, NIC and reporting implication for your employees.
Subsistence is the food and drink you buy when you are traveling for business and is an allowable expense for tax. As a guide, a claim is likely to be ok if the business meeting is at least 5 miles away from the usual place of work.
There is no set limit to how much can be claimed for subsistence when working away however HMRC have set benchmark rates based on minimum trip durations which are currently as follows:
- 5+ hours: £5 per day
- 10+ hours: £10 per day
- 15+ hours: £25 per day
Entertaining can involve eating, drinking and other hospitality. In most cases, other than staff entertaining, the cost of business entertainment is not tax-deductible nor is the VAT recoverable.
Business entertaining could include, for example, discussing a particular business project or forming or maintaining a business connection.
Entertaining a business acquaintance for social reasons would not be considered business entertaining and will have NI and possibly PAYE implications on an employee.
So long as it is not incidental to the entertaining of others, staff entertaining is a deductible expense for tax and VAT but is subject to PAYE and NI for employees. There are a few exceptions to this which are outlined below.
Annual staff party
There is an annual exemption for a staff party costing up to £150 per head so long as the event meets all the following criteria:
- it costs £150 or less per head, or multiple events costing less than £150 in total
- it is an annual event, such as a Christmas party or summer BBQ
- it is open to all employees
If a single event costs more than £150 in total then it is disallowed from the staff party exemption in total, not just the bit that exceeds £150.
Trivial Benefit in Kind
No tax or NI has to be paid on a benefit for an employee if all of the following apply:
- It costs you £50 or less to provide
- It is not cash or a cash voucher (non-redeemable vouchers are allowed e.g. John Lewis vouchers)
- It is not a reward for their work or performance
- It is not in the terms of their contract
There is no cap on the number of £50 trivial benefits that an employee can receive however a director of a close company (a company run by 5 or fewer shareholders) can not receive more than £300 in trivial benefits a year.
No PAYE or NI needs to be reported or paid to HMRC where free or subsidised meals of a reasonable value are provided at a workplace canteen so long as they are provided to all employees.
PAYE Settlement Agreement
Due to the difficulty in assigning the benefit of entertaining accurately to employees, many employers choose to include such items in a PAYE Settlement Agreement (PSA) and pay Income Tax and National Insurance contributions on behalf of the employees.
|Purpose of expense||Allowable for VAT?||Allowable for Corporation Tax||Class 1A NIC due?||PAYE on employee?|
|Subsistence||note 1||note 1|
|Staff entertaining||note 2||note 3||note 4||note 4|
|Client Non Business entertaining||note 5||Maybe – note 5|
|Client Business entertaining||note 6||note 6|
Note 1 – NI and PAYE on Subsistence
Provided a) the claim is made based on actual costs incurred or b) the HMRC benchmark rates are used and c) this is for a business purpose usually 5 or more miles from the usual place of work d) is not for purpose of entertaining.
Note 2 – VAT on Staff Entertaining
So long as the event was available to staff generally within the firm, as is the case with the office party, and not just the directors or partners.
Note 3 – Corporation Tax on Staff Entertaining
So long as it is wholly and exclusively for the purposes of the trade and not merely incidental to entertainment which is provided for customers.
Note 4 – NI and PAYE on Staff Entertaining
Staff entertaining expenses are subject to PAYE and NIC however there is an annual exemption for a staff party costing up to £150 per head.
Note 5 – NI and PAYE on Client Non-Business Entertaining
- If the employer arranges and pays directly for any non-business entertainment the cost must be reported on the employees P11D and Class 1A NIC paid on the benefit.
- If the employee arranges the entertainment but the employer pays, it will need to go on the employees P11D and also through the payroll with Class 1 National Insurance deducted but not PAYE.
- If the employee arranges, pays and is then reimbursed by the employer it will need to go through the payroll with Class 1 National Insurance and PAYE deducted.
Note 6 – NI and PAYE on Client Business Entertaining
No NI or PAYE is due.
If the business (i) pays the cost directly, or (ii) reimburses the employee their actual expense, or (iii) pays them the HMRC benchmark rates then it does not need to be reported on a P11D either.