Entertaining Employees Question

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BIM45033 states that "Staff entertaining is allowable, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers".

BIM45034 provides some examples of where the entertaining is 'merely incidental' and uses the example of an employee taking a customer out to lunch in a restaurant as not meeting this criteria. My question is, does this change where the employee is travelling for business and therefore would have gone out for lunch whether the business guest was present or not? In addition to this, is the treatment of this the same if the business guest is an employee of an overseas sister company?

The context of this is for the purposes of disallowing expenses for Corporation Tax.

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By FactChecker
10th Jan 2024 17:05

I'm tempted to point out that I've never found an 'Employees Question' even remotely entertaining ... but I guess frivolity is not what was sought here.

So ... why do you think this might "change where the employee is travelling for business and therefore would have gone out for lunch whether the business guest was present or not"?
The W & E aspect doesn't relate to why the employee is feeding, but to justification (or not) of the 'entertaining' (i.e. feeding others) being allowable against CT.

[There is of course a whole other tranche of rules relating to whether reimbursement of various expenses to the employee will/won't be treated as a taxable benefit.]

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Replying to FactChecker:
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By 17RDR12
10th Jan 2024 17:25

FactChecker wrote:

I'm tempted to point out that I've never found an 'Employees Question' even remotely entertaining ... but I guess frivolity is not what was sought here.

So ... why do you think this might "change where the employee is travelling for business and therefore would have gone out for lunch whether the business guest was present or not"?
The W & E aspect doesn't relate to why the employee is feeding, but to justification (or not) of the 'entertaining' (i.e. feeding others) being allowable against CT.

[There is of course a whole other tranche of rules relating to whether reimbursement of various expenses to the employee will/won't be treated as a taxable benefit.]

Obviously the proportion of the cost that relates to feeding others is entertaining, but what about the portion relating to employees? (i.e. 9 employees from UK Company A Ltd travel to France for business, go out for lunch and pay for those lunches and also for one attendee from FR Company A SARL)

Would the 9/10 meals be allowable for CT on the basis they would have still occurred had the overseas employee not attended, or can it not be classed as incidental as it is a meal out in a restaurant?

It would seem absurd to me to lose out on the whole deduction as a result of paying for one guest from a different payroll in the same group, but the HMRC guidance to me implies that this would be the case.

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Replying to 17RDR12:
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By FactChecker
11th Jan 2024 13:31

This a fairly complex area ... sufficiently complicated to not be amenable to clarity via a series of factors/considerations being unfurled on a public forum - especially, as I said before, given that invariably discussion moves on beyond pure CT.

If you don't want to study the ITEPA 2003 legislation, then the best place to start is probably https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim325... ... but you've got a lot of reading ahead of you!

FWIW if "the business guest is an employee of an overseas sister company" then presumably they are not a 'customer'; so why not tell them (or their employer) to pay for the portion of the meal relating to that company's employees?

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Replying to FactChecker:
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By 17RDR12
11th Jan 2024 15:07

FactChecker wrote:

This a fairly complex area ... sufficiently complicated to not be amenable to clarity via a series of factors/considerations being unfurled on a public forum - especially, as I said before, given that invariably discussion moves on beyond pure CT.

If you don't want to study the ITEPA 2003 legislation, then the best place to start is probably https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim325... ... but you've got a lot of reading ahead of you!

FWIW if "the business guest is an employee of an overseas sister company" then presumably they are not a 'customer'; so why not tell them (or their employer) to pay for the portion of the meal relating to that company's employees?

Unfortunately we are doing this after the fact, so it is too late but for future cases they will be paying for their own meal.

I understand there are potential issues arising in terms of Employment Income which will be investigated but those are separate from the Corporation Tax question posed.

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By Michael Davies
11th Jan 2024 10:26

Don’t know if this still holds water;but ask for two bills.Bit shameful though in front of client.However can anyone remember bank managers wearing the bank logo on their suits to “try” to avoid a BIK charge.

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By 17RDR12
11th Jan 2024 16:37

Obtaining two bills might prevent HMRC ever asking the question but it doesn't actually answer the question. If one of the two bills would be allowable for CT then it stands to reason that 9/10 of the one bill in the example outlined above would be allowable for CT, doesn't it?

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By FactChecker
11th Jan 2024 17:33

Logically, but HMRC don't like potential loopholes.

For instance: the group of 10 decide to lunch at De Daltons, a high-end restaurant outside of Amsterdam in The Netherlands, where one of them decides to try the Golden Boy burger (a snip at $6,000) ... whilst the others share a platter of starters.
It might be seen that 'who had the world's most expensive burger?' becomes a very pertinent question - and that a 9/10 apportionment will be materially wrong in every scenario.

Unlikely ... but HMRC can be creative with their interpretations.

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By kim.shaw-and-co.com
11th Jan 2024 20:58

No matter how many times I recommend that clients travelling on business obtain separate receipts for subsistence, their coyness in front of hospitality venue staff (or ceasing to care after a beer or two) inevitably results in a single 'chit' for a meal where a local consultant not on the payroll or employee of a fellow Group company was invited along for the ride.

After stomping my feet enough with one globetrotting client company, the consultant's consumption is now separately identified and invoiced back to them ... and in turn re-invoiced back with their monthly fee invoice as their own subsistence forming part of the contract for their services (a reverse charge inward supply which follows the main supply for VAT purposes by way of side-note ...). There is a clear paper trail of what is happening and why. There is then a 'softer landing' for any plea for a deduction in relation to employee costs on account of the consultant's presence being treated as that of a travelling co-worker if push came to shove.

As regards employees of fellow subsidiaries, the policy is equally clear - add the whole bill back for CT and treat as a waste of potential deduction for subsistence. Even if you recharge the guest costs, the remainder cannot be shown to constitute "subsistence" because of the hospitality element introduced. Make clear to travelling principals that the cost of travelling 'payrolled employee' meals with "another" from the local host country company are 33 1/3% higher than if that "other" was not present ... so factor that in to where you choose to take them.

In circumstances where an employee of Company A SARL is invited along and paid for, without the associated cost of their meal being invoiced back to that other Group company, then what you have is effectively business entertaining (makes no difference whether client, supplier or business colleague) and the 'payrolled' travelling employees present are then in receipt of either staff entertaining (if their presence is surplus to a requirement to entertain the business contact) but subject to a 'wholly and exclusively' issue if consumption cannot be separated person-by-person, or a wholly disallowed cost for CT (if their presence is required).

If you think about it - if their presence is not required to entertain a business contact then why are they not sat at another table getting a separate bill of their own for their subsistence ? So if that's the scenario that's what the policy likely ought to be. Trying it on with a subsistence argument in circumstances where anyone other than fellow employees also travelling 'on business' are present is analagous to building a house on quicksand in practice.

Where employees travelling on business dine together that is an "exceptional situation" where HMRC don't presume a hospitality motive as a pragmatic acceptance of 'reality'. What they might have done anyway is not the point, it is what they actually did resulting in the expense being incurred which is relevant to any particular expense being considered.

You can argue these points how you wish but don't expect HMRC to extend such a "pragmatic" presumption when 'AN Other' who is not employed by the paying company and travelling on business overseas comes along for the ride. If you don't want to run the risk of a hospitality rather than subsistence outcome then employees should not invite anyone else to 'come dine with them'.

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Replying to kim.shaw-and-co.com:
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By 17RDR12
12th Jan 2024 09:00

Thanks for the comprehensive answer, much appreciated

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