To make sure you don’t pay tax unnecessarily, this blog lays out the Corporation tax, PAYE, National Insurance and VAT obligations of paying for food and drink through your business.
Business v Non-Business Entertaining
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.
The key question to ask yourself to determine if entertainment is business or non-business is ‘Is the entertainment Wholly and Exclusively for the purposes of the business?’
This means that any non-business element must always be disallowed for corporation tax and VAT purposes and may also have PAYE, NIC and reporting implications for your employees.
Some specific obligations around the taxing and reporting of non-business entertainment include:
- If the employer arranges and pays directly for any non-business entertainment the cost must be reported on the employee 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 employee’s 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
Even though there is no corporation tax or VAT relief for the company of business entertaining, it is still worth paying for it through the business rather than out of your post-taxed income.
So long as it is not incidental to the entertaining of others, and the entertainment was available to staff generally, not just directors, then staff entertaining is a deductible expense for corporation tax and VAT. It is still subject to PAYE and NI for employees.
Annual staff party
There is an annual exemption for PAYE and NI 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.
Not all Food or Drink paid by the business is taxable
Subsistence is the food and drinks you buy when you are travelling for business and is an allowable expense for tax. This means it is deductible for the company for Corporation Tax and VAT and neither is it taxable on the individual consuming it.
As a rough 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
HMRC updates these scale rates each year so please check HMRC’s website for the latest rates.
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.
The company can claim back the corporation tax on VAT on gifts to employees
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 entertainment 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.
The rules are complex and this is a simplified guide so please get in touch if you would like advice tailored to your specific situation.