We are currently seeing significant evidence of an increased focus on staff entertaining by HM Revenue & Customs (HMRC).
The deadline of 5 July 2019 for making arrangements to report staff entertaining for 2018/19 is fast approaching and time is of the essence to ensure you're reporting taxable amounts correctly.
What is the issue?
Letters are being sent to companies where HMRC have identified the following:
staff entertaining costs have previously been included in the company accounts
there is no PAYE Settlement Agreement (PSA) in place, or staff entertaining has not been reported on forms P11D.
Staff entertaining provided to employees can be a taxable benefit. It includes social functions, staff events and parties. Employers can choose to have it included on their PSA so that they settle the tax and Class 1B National Insurance Contributions (NICs) due on behalf of their employees or it should be reported on the employee forms P11D with the company settling the Class 1A NIC due.
Is all staff entertaining taxable?
No. There is an exemption available for annual events where certain conditions are met. The staff entertaining provided must meet all of the following conditions:
costs £150 or less per head
is annual in nature (eg. Christmas Party, Summer Barbecue)
is open to all your employees.
The nature of the entertainment provided can give rise to a number of complexities in applying the exemption. These include such things as calculating the cost per head where employees are able to bring a spouse/partner, including the cost of travel/accommodation and where multiple parties are held for employees across a number of different sites or locations.
What about trivial benefits?
Where staff entertaining is not covered by the annual events exemption it is useful to consider whether it would meet the conditions to be exempt under the rules for trivial benefits provided to employees. Trivial benefits can be provided to employees free of tax/NIC where the following conditions are met:
the cost of providing the benefit is £50 or less
the benefit is not cash or a cash voucher there
is no contractual entitlement and it is not under a salary sacrifice arrangement
not provided in recognition, or in anticipation of, particular services performed by the employee as part of their employment
if the employer is a close company (a limited company with five or fewer 'participators') and the benefit is provided to a director/office holder of the company (or family member) the exemption is capped at a total cost of £300 per tax year.
What are the implications of getting it wrong?
Firstly, there is still time to put things right for the 2018/19 tax year and there is further information on this below.
For earlier tax years, where taxable staff entertaining has not been reported correctly, HMRC can look to recover the tax and NIC due for the past four years for tax and up to six years for NIC. HMRC may also apply penalties and will charge interest on the unpaid tax and NIC. For past years, we recommend that a voluntary disclosure is made to HMRC. It can also be possible to mitigate potential penalties where the disclosure is unprompted.
How we can help?
We have a wealth of experience dealing with HMRC in situations such as these and can provide the support you need to meet your staff entertaining reporting requirements. Depending on your current arrangements there are a number of various ways we can assist you, which include:
Arranging a PSA contract with HMRC for the 2018/19 tax year
Applying to HMRC for staff entertaining to be included on an existing PSA for 2018/19
Providing assistance with the preparation and submission of the PSA computation for 2018/19
Analysis of staff entertaining costs and identifying opportunities to apply available exemptions and reliefs
Assistance with making voluntary disclosures to HMRC of unreported staff entertaining benefits provided in earlier years
Providing guidance on best practice to minimise future risk and identify opportunities to maximise efficiencies using alternative reward structures
If you would like further information on the support we can provide please get in touch with Mike Herdman, or contact your usual employment tax expert.