No relief from entertainment
As a general rule, whether your business pays for a light lunch with a customer, or tickets for them to go to a sporting event, it’s categorised as business entertainment and therefore the cost isn’t tax deductible. The exception to this general rule is staff entertainment.
Tip – A tax deduction for the cost of staff entertainment includes costs relating to director shareholders. By concession HMRC extends this rule to all business owners, i.e. business partners and sole traders, who take part in staff entertainment.
Not so generous
The exception for entertainment of staff and business owners isn’t as generous as it seems. While your business gets a tax deduction, your staff might be taxable on the value of the entertainment as a benefit in kind (unless one of the special exemptions apply).
Your business will have to pay Class 1A NI on the taxable amount. Plus, the cost will increase further if, as is the norm, your business meets the tax payable on the benefit in kind.
The costs of staff entertainment are both tax deductible for you and tax free for your employees where the following conditions are met:
- the event occurs annually, e.g. a summer or Christmas party
- the cost to you per year per employee is no more than £150 including VAT. The £150 is doubled where the employee brings a guest; and
- all employees (or all those at one branch or department) are invited.
Tip – What’s less well known is that you can use it in conjunction with a promotional event held for say, potential customers, for costs which are charged per head.
Acom puts on a summer barbecue for 100 customers and suppliers. All 20 staff from head office are invited to help host the event. The caterers provide all the equipment and servers at £45 per head. In addition there are overhead costs such as table and chair hire and the free bar. These can’t be specifically attributed to employees and so the exemption can’t apply to them. However, the £45 cost per employee is within the exempt amount. So not only can Acom claim a tax deduction for the cost of entertaining its employees but they won’t be taxed.
Tip – Where feasible ask suppliers to express charges per head, e.g. for food.
As an alternative to Exemption 1, benefits in kind for an employee are tax and NI exempt if they cost you, the employer, no more than £50 per head, taking account of all the costs of providing it.