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dog in christmas party glasses | accountingweb | HMRC nudge letters - Can you prove you’re recording business entertaining costs correctly?
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Business entertainment: Goodwill and compliance are not just for Christmas

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The festive season comes but once a year and so do the questions of what is and what is not allowable. Like dogs, compliance is not just for Christmas, but are employers always aware of their recordkeeping obligations?

20th Dec 2023
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In the season of staff parties, gatherings and gifts HMRC plays the Grinch and has been sending nudge letters to employers, reminding them of the need to be robust about their recordkeeping obligations at this time of year. Here is a reminder for employers, agents and bookkeepers of the concessions available plus the recordkeeping obligations.

Staff parties

Strictly, this is in legislation as “annual parties and functions” in  Income Tax (Earnings and Pensions) Act 2003 (ITEPA) Section 264. So, the rules do not only apply at Christmas but could be a mixture of a summer function and a Christmas party.

Since 2003, ITEPA allows a (generous?) tax exemption of £150 over the course of the tax year where it is open to all employees or all employees at one location if the employer has multiple sites. The £150 per attendee includes:

  • the cost of the function, and
  • the cost of the travel and accommodation costs that are associated with it.

So, employers need to look at the total cost of provision, including the associated costs, and divide it by the number of attendees, regardless of whether they are employees or not (thereby opening this up to partners of employees). Note that directors, partners and sole proprietors are not employees. 

Once the total VAT-inclusive cost is known, simply divide this by the number of attendees.

  • If this is £150 or less, there are no reporting obligations.
  • If this is £150.01 or more, this becomes a taxable benefit on the employee declared on the P11D (humbug), though employers will frequently enter a PAYE settlement agreement (PSA) so they cover the tax and national insurance.

Whatever the value, there are recordkeeping requirements, as HMRC will want to see the employer’s rationale for arriving at the plus or minus £150 per head value.

The cost of entertaining employees is regarded as an allowable expense for corporation tax – not so client entertaining. HMRC’s definition of employee for VAT also allows input tax to be recovered. However, this definition does not extend to partners/spouses, so there is apportionment required here where guests come to annual functions.

HMRC advised in 2020 that the above conditions also apply to “virtual parties” – the Christmas party via Zoom.

Gifts to employees

Cash is king. If the employer gives the employee £30 to buy a turkey, this is regarded as remuneration and must be paid through the payroll for Class 1 national insurance. The tax liability can be accounted for by placing on the P11D, though collection through the payroll is better. However, if the employer gives the employee £30 that is exchangeable for a turkey, this is different. In summary:

  • cash (or vouchers that can be converted to cash) – think payroll
  • gifts and non-cash vouchers – think trivial, though this applies to any gift at any time in the tax year.

The trivial benefit exemption is useful for employers. It allows them to give employees gifts and non-cash vouchers up to the value of £50 on each occasion, exempt from any income tax, national insurance and reporting obligation (there will still be an internal recording obligation, though). This means that a £30 turkey can be provided on one day, a £40 high street voucher the next day and a £30 box of chocolates the next. Of course, there are qualifying conditions for the gift/non-cash voucher to prevent abuse.

  • The £50 cannot be a reward for past or future performance in their role.
  • The £50 must not be in the terms of conditions of employment (for example saying “as well as other benefits, we will give you a turkey every year up to the value of £50”).
  • The £50 cannot be part of a salary exchange/sacrifice agreement. If it is, the optional remuneration arrangement rules apply and not the trivial benefit exemption.
  • The actual cost of provision must not be more than £50. A turkey that costs £50 with a £5 administration charge, therefore, does not meet the exemption criteria. So, consider what it actually costs to provide the gift.

Directors of close companies (run by five or fewer shareholders) have the trivial benefit exemption capped at £300 per tax year.

Note that the exemption also applies to members of the employee’s family. So, for example, a £40 bunch of flowers to the employee’s partner when giving birth would also qualify.

Employers should also note that an averaging calculation can apply where benefits are provided to several employees, and it is impractical or impossible to apportion a value to each employee. Again, provided the cost of provision is, on average £50 or less, the exemption can apply.

Again, it is useful for employers to use this, not just at Christmas. Good internal recording of provision values is required. Where £50 is exceeded we are in PSA territory again (unless the employer really wants to say to their employee that the gift they have been given is taxable!).

Gifts to and from third parties

Employees may receive gifts from third parties rather than the employer. Or you may give gifts to the employees of other employers.

Following on very broadly the same rules as the trivial benefits exemption (not cash, not a reward and so on), if the cost of provision is up to £250, from 2003, ITEPA 324 regards this as a “small gift”. That’s £250 as a gift or gifts over the course of the tax year.

If the gift or gifts are over £250, this takes us into reporting via the taxed award scheme rules. These are similar to but not the same as the PSA.

Third-party hospitality

ITEPA 265 talks of third-party entertainment, which is not the same as giving a gift as above. Again, this applies for all the tax year but is, perhaps, most commonly at Christmas. 

The legislation says there is no income tax or national insurance reporting or recording liability for “hospitality of any kind”. HMRC’s interpretation of this is in the employment income manual as:

  • any form of hospitality (dinners, parties, hospitality tents at sporting events and so on)
  • events such as theatrical performances or sporting events, such as Wimbledon.

This includes associated costs such as those incurred in travel or overnight accommodation. However, it’s not quite as simple as that. HMRC regards third-party entertainment (and the act of being hospitable to, maybe, a client or supplier) as one where the employer is normally present. Or, at least, someone who represents the employer. 

Therefore, the restriction on this statutory exemption should really be read as “employer-accompanied hospitality and entertainment”. 

The season of compliance

While it may be the season of goodwill, it is also the season of compliance. HMRC does seek to educate employers and remind them of their recordkeeping and reporting responsibilities, and this is to be welcomed.

At this time of year, indeed any time in the tax year, look out for:

  • the value of staff functions (remembering the £150 exemption)
  • the value of staff gifts (remembering the £50 trivial benefits exemption)
  • the value of third-party gifts (and the £250 exemption), and
  • be hospitable to third parties – but make sure there is an employer representative on hand to accompany it.

Replies (4)

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the sea otter
By memyself-eye
20th Dec 2023 11:26

Good article - I'm off to buy my (sub £50) turkey now...

Thanks (1)
Replying to memyself-eye:
paddle steamer
By DJKL
20th Dec 2023 17:25

Hold on until the 26th and you will get two for £50

Thanks (1)
Replying to memyself-eye:
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By FactChecker
20th Dec 2023 22:03

Exemplary indeed.

It's never too late to learn (in 30+ years of this game I hadn't been aware of the need for employer attendance at 3rd-party events - although it will nearly always have been the case).

A copy should be issued to all small agents (as in OMBs, not those of restricted height) - and quite probably to any HMRC staff who are supposed to liaise with their 'customers'.

Whether Ian could then charge them for it is another matter - but Happy Hols!

Thanks (2)
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By Mr J Andrews
21st Dec 2023 15:00

A valid point Ian - that directors , partners and sole proprietors are not employees. A moot point however whether they should be denied some goodwill at this time of year.
Should not directors and partners qualify as attendees at their staff parties subject to the per head ceiling figure. But what about the poor old sole trader and small husband / wife partnerships with no help other than their school kids helping out - and effectively employed - in the family business ? Apart from paying them a reasonable amount for duties carried out and below PAYE thresholds , why not treat them to an annual bash ?
The decision in Dollar & Dollar v Lyon [ 1981] STC 333 would appear helpful here. So would the HMRC's internal Business Income Manual { BIM 37737 }.

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