Let me entertain you
You have had an excellent year and you want to hold a party to thank all your employees who have been vital to its success.
What should you think about in terms of tax?
Business entertainment itself is specifically excluded from tax relief because nobody would ever make a profit from an office party, for example. The only exception is staff entertainment, which is allowed as it has a business purpose.
Staff can include spouses, partners, retired employees and directors.
As the staff entertainment must still meet the wholly and exclusively rule, unduly lavish events, particularly those aimed at management or directors only, are likely to be deemed excessive and without a business motive. This could mean that HMRC will deny the company tax relief for all of the expense.
Unless exempt, directors are liable to income tax on entertainment costs incurred by the company from which they benefit. The company must declare the benefit for tax and Class 1A NI purposes, but only the latter if the benefit has been payrolled.
Sometimes, for director shareholders, paying out a dividend which is then paid back to the company to cover the cost of the business entertainment is more tax efficient.
What other ways can reward employees in a tax-efficient way?
There is a concept in tax called Trivial benefits, which is essentially where the employer can provide things to your employees that are tax-exempt.
The exemption allows employers to provide unlimited tax and NI-free perks (i.e. retail vouchers) to employees if they each cost no more than £50.
The interesting thing here is that there is no actual ‘limit’ on how many times the vouchers can be provided to your employees, so you could, in theory, provide 2x £50 vouchers at Christmas to each employee.
For directors, such perks are capped in value per tax year at £300 – i.e. 6x £50.
Furthermore, if your spouse is also a director then this would apply to them also, so the tax benefit could be £600 per year.
However, there are things to watch out for.
What do you need to watch out for?
Apart from the £50 and £300 caps, you also need to make sure that the following doesn’t apply:
- the benefit is provided as part of a salary sacrifice or optional remuneration arrangement
- it’s given as cash or a voucher that can be converted to cash
- it’s part of the employee’s contractual earnings; or
- it’s given in recognition for particular services performed by the employee as part of their job.
HMRC’s view is that a benefit provided regularly is a customary part of an employee’s earnings and, therefore, may become contractual pay. But, the guidance also says that the exemption can apply to Christmas and birthday gifts.
Does regularity matter?
We wouldn’t have thought this to be the case, but it’s possible that low value benefits for employees provided regularly might become customary over time and therefore viewed as a contractual reward for their employment.
If you are providing vouchers, just make the timings random and not fitting with any of the conditions above i.e. Christmas, a birthday etc. And, remember the vouchers can be anything from £10-£50 each.
Rewarding your employees should feel like a pleasure, not a chore. However, before you treat your team over the festive period and for other celebrations, ensure you are staying ahead of the tax game.
It is worth being aware of the tax implications of entertainment and considering Trivial benefits which are easy to understand and implement as reward schemes in your business.
If you would like any support or advice on rewarding your team in the most tax-efficient way, let’s arrange a quick chat.