PTP's Tax Tip No. 35 ' Entertaining tales part 1

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Entertaining tales part 1

Q.My building contractor client is enduring an employer compliance review and has been asked for a copy of the information he has given to people he has entertained over the past year. Does he have to keep records of this? I've never heard of it!

A.Unfortunately yes! Reg 95 of the PAYE regulations is designed to attack backhanders that are received by third parties by reason of an employment but which by-pass the P11D reporting system. It requires employers to give the recipients a note of the cash equivalent of what they have had so that they can put it on their tax return ' thus making the benefit much less attractive! The regulation applies where the recipient is not the employer's employee but the employee of someone else, and the provider of the benefit wo...

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25th Oct 2005 17:27

Does S 265 apply?
I think that S. 265 is much more limited than that: it refers to 'particular services', so one must be able to identify them and tie them in with the entertainment. The entertainment must also be 'in recognition' of services provided in the past, or 'in anticipation' of particular services 'to be' so performed. Note the words 'to be' - there is an assumption that it is agreed that the services are actually going to be performed here.

This condition seems to me to apply to backhanders as intended, but not to general entertainment in the hope of getting business. So I'm afraid I don't agree with you on any of the examples that you give (although the retail buyer might be close to the line).

Just think of the paperwork involved if it did apply to cases like that - the City would grind to a complete halt! The Revenue have their tax on entertaining by virtue of not allowing a deduction in the entertainer's accounts - they don't need a double dip into taxpayer's pockets. I'd challenge it.

David Kirk
[email protected].

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24th Oct 2005 23:06

Are you sure?
Confusing this. S. 265 of ITEPA says that no liability to income tax arises in respect of the provision of entertainment for an employee, where the person providing the entertainment is not the employer (there are various other related conditions that one need not go into here). So the other person's employee cannot be taxed.

To see whether reg. 95 applies one has first to consider whether the employee's employer would have had to put the benefit on the P11(d) had he been doing the entertainment. He would do under reg. 87(1)(c), as S. 265 does not apply. One could then say that reg. 95 does apply because reg. 85 does not, in which case details have to be given; or one could say that by virtue of the fact that S. 265 applies the entertainment is not a benefit, and so one does not have to.

The upshot of this is that, if (which I doubt) one does have to give details, they are of no value to the Revenue because they cannot collect any tax. I should have thought that a challenge to the adjudicator or (if things are really nasty) a judicial review ought to dispose of this request.

David Kirk,
[email protected].

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25th Oct 2005 15:55

Reply from Andrew Gotch
Dear David
Thank you for your comment.

Fair point about s.265, but of course there are those 3 conditions that have to be satisfied, the last being that it should not be in respect of or in anticipation of the provision of particular services. Tricky one – would a retail buyer given a Wimbledon ticket not be getting her/his ticket specifically because of how much she/he bought from the provider of the benefit? I would say so. Would many if not all directors get invited on an accountancy firm’s golf day in anticipation of them voting that the firm should continue to be, or should become, appointed as auditors? Very likely. I once came across a case of the owner of a construction company entertaining (lavishly) the quantity surveyors of a larger contracting concern. Clearly not within s.265 on any view, I’d have thought. I suppose the recipient could take a view on an individual basis – but it would certainly be risky to see s.265 as a blanket exemption, because it isn’t that. Acts of spontaneous and unprompted generosity are within it, and rightly so, but there aren’t too many of those about in the business world; everything else has to be examined and treated on its merits.

I can see that s.265 (or 324 for that matter) would be more likely to apply if a third party entertained a group of employees as a bunch; but I think the analysis becomes significantly more difficult where particular individuals are invited to better quality events – there’ll very often if not invariably be some defined end in view, and it’s the provider’s perspective that’s important for s.265. The provider cannot second-guess the exemption and not provide a return of the cash equivalent – because the exemptions would not apply if the recipient was his own employee.

So – an administrative nightmare, but effective anti-bung legislation – and not really something for the Adjudicator or judicial review (if possible) in the ordinary course of events, I’d have thought.

Andrew Gotch

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