The tax rules around staff entertaining and gifts

By Knill James Tax Manager, Zelie Byrne

Entertaining staff or buying them a gift is common within most workplaces but can lead to an unexpected tax liability for the employee or the employer. This happens when the entertaining or gift is a taxable benefit, but the good news is that there are a number of exemptions available. 

What are the exemptions to ensure entertaining and gifts are tax free?

1. Business Entertaining exemption

Where staff attend events that are predominately provided for the entertainment of clients or other people, no taxable benefit arises on the employee.

There is however a statutory disallowance of the expense in calculating the business's taxable profits and input VAT should not be reclaimed on non-staff entertaining.

2.  Annual functions exemption

The details of this exemption are that the function must:

• be open to all your employees
• be annual, such as a Christmas party or summer barbecue
• cost £150 or less per person (this is based on the number of attendees in total rather than the number of employees, so if the employees' partners were invited the cost per head would be calculated accordingly)

An employer can have multiple events in the year covered by the exemption as long as the combined cost of the events is no more than £150 per head.

3. Trivial benefits exemption

Another exemption that can also be made use of (both in terms of functions and gifts) is the trivial benefits exemption. An employer doesn't have to pay tax on a benefit for an employee if all of the following apply:

• it costs the employer £50 or less to provide
• it isn't cash or a cash voucher
• it isn't a reward for the employee's work or performance
• it isn't in the terms of the employee's contract

What if the entertaining or gift isn't exempt?

The provision of staff entertaining or gifts that doesn't meet one of the exemptions will result in a taxable benefit arising. There are two options for an employer for how to report these taxable benefits, each with different tax implications and deadlines.

1. Reporting benefits via P11Ds

P11Ds are forms used to report taxable benefits provided to employees. The employer pays Class 1A National Insurance and the employee is subject to income tax at their marginal rate (20, 40 or 45%) on the value of their total benefits.

The deadline for completion of the forms, submission to HMRC and providing copies to the employees is 6 July following the end of the tax year. The Class 1A National Insurance must be paid to HMRC by 22 July.

P11Ds may not be suitable for reporting entertaining and gifts due to the employee being subject to income tax on the value.

2. PAYE Settlement Agreement

An alternative to P11D reporting is for the employer to apply for a PAYE Settlement Agreement 'PSA' with HMRC. A PSA allows the employer to pay the income tax due on the benefit on the employees' behalf along with Class 1B National Insurance on the grossed up value of the benefit.

Expenses can be included within a PSA if they are minor, irregular or impracticable.

Applications for a PSA must be completed online through the HMRC Government Gateway, and the deadline for applying is 5 July following the end of the tax year.

Once a PSA is in place, it remains until it is amended to add or remove benefits or is cancelled.

The deadline for submission of the calculation of the income tax and Class 1B NIC due and the payment is 22 October following the tax year.

How can we help?

We can do the following:

• review the staff entertaining and gifts and advise whether there are any taxable benefits
• prepare and submit P11Ds
• apply for PSAs and calculate the amounts due to HMRC under the agreement

Contact

If you need help or advice, please contact Zelie Byrne on zelieb@knilljames.co.uk or 01273 484942.