There are various exemptions available to employers in connection with entertainment and gifts to staff, but if you are outside of these, there will be a tax liability.
Where any of these are linked to salary sacrifice, the exemption will not be available and tax will be payable on the higher of the cost to the employer, or the amount of salary foregone. Providing not linked to giving up salary, the most common exemptions available are:
Annual events available to all staff at the location
This could include the typical Christmas or summer party, but will not include departmental meals or a leaving do because these are unlikely to satisfy the “annual event” or “available to all staff at the location” tests, both of which must be satisfied.
For events that satisfy the tests, there is an exemption of £150 per head. This is an exemption, rather than an allowance, and therefore if the event cost exceeds £150 per head, inclusive of VAT, the whole amount is taxable, not just the excess. You need to consider the full costs of the event inclusive of associated costs such as transport home.
If there is more than one potentially qualifying event then the exemption can be applied to all providing the cumulative cost, inclusive of VAT, is below £150 per head. If more than £150 per head in total, you can choose which events are to be covered by the exemption with the others taxable unless they can be covered by another type of exemption.
The exemption for annual events available to all staff at the location is per head and therefore if a staff member is, for example, able to bring their spouse, the cost for the guest will also benefit from the exemption. Please note that if the event does not qualify for the exemption, a taxable benefit arises on the employee in respect of the cost for both them and their guest. (See PSA guidance below where it is not intended that the employee suffer the tax on this.)
The Trivial Benefits exemption covers gifts of up to £50 per head that are provided to employees for non-performance reasons. For example, gifts and celebrations for birthdays, a new baby, etc. can be included within this exemption, but good sales figures or employee of the month style awards cannot. There is no limit to the number of gifts that can be provided to employees, but there is an annual limit of £300 for directors and members of a director’s household.
Smaller, more frequent, events and treats can therefore be more tax efficient than larger events. You do need to ensure that gifts or events cannot be linked, or you will need to consider the full combined cost when determining whether the exemption is available. For example a monthly subscription costing £10 per month for a year would be combined to give a cost of £120 which exceeds the trivial benefits exemption and is therefore fully taxable.
Subsistence provided to staff working away from their permanent workplace(s) for a certain amount of time should be free of tax providing they are within the HM Revenue & Customs scale rates, or fully supported by receipts. A bespoke agreement may be possible where a flat rate expense can be supported by evidence to show this reflects the true level of average expenditure.
Food provided at the workplace (at reasonable cost) is exempt providing this is available to all staff regardless of whether the food is supplied by external establishments.
Restaurants, cafes, etc have additional conditions to meet in order to qualify for the exemption in respect of their own staff.
Food for office based meetings (other than all staff) is likely to be taxable unless you can satisfy the “available to all staff” requirement. It could become exempt by making the meeting available to all staff, or ensuring food is also available to those not invited to the meeting.
Not all staff have to accept the offer of lunch, just have the “opportunity” of lunch. You clearly cannot demonstrate that food is available for non-invitees if you only purchase a specific meal for each meeting attendee, but it may be possible if you purchase a platter of sandwiches and cater to ensure all staff have the opportunity for food.
This exemption relates solely to food at the workplace with off-site food only be exempt if it falls within the exemptions for annual events, trivial benefits or subsistence.
Long service awards
The tax relief available is not at all generous and no gifts are exempt for less than 20 years’ service. However, where 20 years’ service has been achieved a gift of the value of up to £50 per year of service can be exempt providing this is not paid in cash.
PAYE Settlement Agreement (PSA)
Staff entertaining and gifts outside of the exemptions will be taxable. Given that these are generally “feel good” things for staff, it is undesirable to include the taxable benefit on a form P11D which will provide the employee with a tax cost that may undermine the goodwill generated at the time of the event. A PSA is the usual way to overcome this problem, but a PSA should not be seen as a tax saving measure. They are quite expensive because they work on the “grossing-up” basis (taxing the amount required to leave the benefit as the net amount). From a budgeting perspective, businesses should consider the full cost including the PSA tax and NIC liability when determining the value of gifts and events.
The application deadline for a PSA depends on what is to be included on the return. The deadline being the earlier of:
- The date that PAYE tax or National Insurance would be payable if a PSA is not in place, or
- 6th July following the end of the tax year.
Store vouchers are the most common item requiring the earlier agreement because while generally a P11D item for tax, there is an immediate charge to National Insurance through RTI. Without a valid PSA you must apply NIC on or before the date the voucher is provided to the employee. It is therefore recommended to apply for a PSA as soon as you think there will be a need for one, rather than waiting until close to the 6 July deadline. It is preferable to have to file a nil PSA, rather than discover that your benefit cannot be reported on a PSA.
Contact Menzies Employer Solutions Tax team
For more information on the above to to understand the tax exemptions available for staff entertaining and gifts, then please contact Andrew Brookes and the Employer Solutions team directly via the contact from below.