Staff Entertaining & Incentives: Avoiding the hidden tax traps

Retaining good staff is a vital element in the success of many businesses, and ensuring they feel rewarded and appreciated will be part of ensuring this. At this time of year, often plans for a Christmas party or other end of year celebrations are well under way. It’s key Employers understand the tax implications of such events, both to avoid any unexpected costs and to make good use of the available exemptions.

The first important exemption covers annual staff events where the cost per head is under £150.  The event must be open to all employees. The £150 threshold is an annual one so this could incorporate, say a Christmas meal and a summer barbecue. It’s important to remember it’s a threshold not an allowance, so inadvertently spend £155 per head on an event, and the whole amount becomes taxable.

Trivial Benefits is the next useful exemption and is designed to cover small perks provided to employees, typically things like flowers, a bottle of wine, or a team lunch. There are some conditions to be aware of, to be covered the cost must be below £50 per employee, it cannot be cash or a cash voucher, cannot be specific recognition for services under an employment contract, and must not be a contractual entitlement. 

For any staff entertaining or incentives outside of these exemptions, the default position is that the costs become taxable benefits for the employees, reportable on forms P11D each year. The employee will be charged to income tax on the values as well, and in some cases both employee & employer could have National Insurance liabilities. This is something most Employers wish to avoid, and so the alternative is a PAYE Settlement Agreement; the Employer makes an agreement with HMRC to settle the tax & national insurance costs on behalf of their employees.

Another tax to come into play is VAT, the good news is that an input VAT incurred in the provision of staff entertaining is generally recoverable. A common pitfall here is the distinction between staff, and other contractors or suppliers who may be included in company events. It’s important to recognise these are not employees, and the element of VAT relating to their attendance is not recoverable.

Underpinning all of this, keeping records of exactly who attended what events in the year, and for whom any minor gifts are purchased is crucial, to support the tax treatment should HMRC make any enquiries.