Over Christmas, you were roped into entertaining clients and it was late in the evening when you finally took an expensive cab ride home. You had this reimbursed by the company, and a colleague says that you will have to pay tax on the cost of the journey. Surely this can’t be right?
Your question relates to the HMRC rules governing staff entertainment. The term “staff entertaining” is difficult to define, because it does not always fit the nature of the actual event. A staff meeting at lunchtime to discuss staffing and budgets could not be put down as “entertaining”, but if staff attend, with no clients present, it is taxable.
Staff entertainment (as well as gifts) is seen according to the circumstances and the rules that apply; they can be seen as exempt benefits, taxable benefits, or a trivial benefit. If it is taxable, the employer must report it on the employee’s P11D or settle the tax via payroll or, of course, include it in the PAYE Settlement Agreement (PSA).
Business entertaining is not a taxable benefit, but the event must have a genuine business purpose.
Exemption for staff entertainment is mainly for “annual events”, including for Christmas staff parties. To qualify for exemption the following conditions must be met.
- The event must be open to all employees ‒ an event exclusively for directors does not qualify;
- The maximum allowable per annum per head is £150;
- The calculation for the cost of staff entertainment/“annual events” (at £150 per annum per head) must include ALL expenses, including catering, venue hire, entertainment, decorations, AND taxis home for staff, and VAT. To arrive at the cost per head, the cost can be divided by the number of attendees, whether they are staff or not.
- If annual events are held for staff, i.e. a Christmas party that costs £100 per head and a summer barbecue that costs £60 per head, only the Christmas party will qualify because the barbecue tips the total cost over £150. See the HMRC example here.
- Any other staff-entertaining event that does not satisfy the annual event exemption will be a taxable benefit. Other events held in the office or elsewhere for staff only, are taxable, including working lunches, business events, and staff socials.
Can a cab ride home reimbursed by the company be classified as taxable?
Taxis home must have been included in the calculation of the overall party (at £150 per head), but if the limit is exceeded, the benefit must be reported on each employee’s P11D, or alternatively, the grossed-up tax can be paid by the employer through a PAYE settlement agreement (PSA). If the total cost per head exceeds the allowed £150 per annum, this pulls both employer and employee into dangerous territory as it can lead to an additional tax and national insurance bill of a further £140 per person! The employee is liable for the tax unless the employer enters into a PSA with HMRC to meet the tax liability, which will be calculated on the grossed-up amount.
I hope this helps, but do watch out for expenses relating to “staff entertaining”, and for that matter, beware, and keep a close eye on all expenses that can result in extra tax and national insurance liability, and for that matter, VAT. Staff training, seminars, and conferences are other areas where businesses can claim quite generous tax relief, but you must stick to the rules. Read more here, or get in touch with DNS Accountants to help you benefit rather than fall foul of these incentives.