Practical guide: does entertainment need reporting on your P11D?

Introduction

Staff entertainment for benefit in kind (BiK) purposes is prone to errors. Many businesses under-report it. This is likely due to a distinct lack of HMRC guidance and a common misunderstanding that if entertaining is for business purposes, then it is automatically not taxable. But despite this, it is an area that, once understood, is straightforward to get right.

You can also proactively plan to minimise tax liabilities and report the right amounts to HMRC.

Meaning of “entertainment”

Entertainment has a broad meaning in this context. It includes any form of entertainment or hospitality provided, even where the entertaining is incidental to something else, such as a staff conference or training session. Examples of staff entertainment include big events like Christmas parties and holidays, and smaller occasions like working lunches or a pub trip.

When is it taxable?

Entertainment is always taxable in the first instance. You must then consider whether an exemption applies to your firm's particular circumstances, or if there is another reason for the entertaining to not be taxable. Key exemptions and other potential reasons for non-taxable treatment are detailed below.

You should consider upfront whether the entertaining can be structured so that an exemption applies or whether alternative entertainment can be provided that does meet an exemption. This will help to minimise tax and NI liabilities.

If the entertainment is taxable, it must be reported via the P11D forms and be subject to Class 1A NI at 13.8%.

It can be reported via a PAYE settlement agreement instead if agreed with HMRC, but this will be more costly to  due to grossing up the tax.

If an employee’s family or household members are also entertained, and the entertainment is taxable, then the tax charge will fall on the staff member.

Annual functions exemption

This exemption applies to annual parties if the event is open to all staff (or all at a particular location) and the cost per head is no more than £150 (including VAT if applicable). Where your firm has more than one event in a tax year that meets these conditions, the combined cost per head needs to be considered. You can exempt any mix of events where the combined cost per head is less than £150. Any other events will not be exempt by this exemption.

You can choose to exempt the mix of events that would result in the highest tax and NI savings. It is usually most beneficial to include the ones with the highest overall cost - not the ones with the highest cost per head. Run the numbers and compare them.When working out the cost per head, all attendees, not just staff, should be used, and all costs associated with the event (including food, drinks, transport, and accommodation) need to be considered.

Trivial benefits exemption

This exemption applies if the entertaining costs no more than £50 per head (including VAT), the event is not a reward or incentive for services of the employment, staff have no contractual entitlement to the entertaining, and the entertaining is not provided as part of a salary sacrifice arrangement. HMRC’s guidance at EIM21864 is useful.

Unlike with the annual functions exemption, the cost per head only uses staff in the headcount. Directors are restricted to no more than £300 of such benefits per year.

Your firm can take advantage of the trivial benefits exemption for entertaining for an employee’s birthday, seasonal events, and any other events that are not related to performance (past or future).

Training exemption

This exemption applies to any staff entertainment that is incidental to work-related training.

Work-related training for staff includes any training course or other activity designed to improve or reinforce knowledge, skills or qualities which are likely to be useful for their job or will better qualify them to do the job.

Your firm can design events that are primarily for training but which are also fun, engaging and enjoyable, to take advantage of this exemption. However, you must be aware that if the purpose of a certain element is to provide entertainment not connected to the training, reward or incentivise, or to be an unconnected inducement, then the exemption does not apply.

Food, drink and temporary living accommodation that is provided as a consequence of the training is considered incidental.

Where your firm is already providing training, it can take advantage to add an additional, tax-free benefit to its staff, that meet the criteria. However, you must be aware of the restrictions as noted above.

Subsidised or free meals exemption

This exemption applies to free or subsidised meals provided at your firm's sites or offices, if all staff (or all staff at a particular site or office) are able to obtain at least one free or subsidised meal within the tax year. The meals must be on a reasonable scale and not be provided as part of a salary sacrifice arrangement. The word “meal” here includes light refreshments.

So that this exemption applies to all meals provided onsite in a tax year, you just need to make sure that every staff member is able to have one free or subsidised meal within the tax year.

Incidental to client entertainment

Where firm's staff are entertained as a consequence of entertaining clients, the entertainment element is not taxable.

The reason for and purpose of the entertaining event needs to be considered - is it to maintain or further a client relationship or is it to entertain staff?

It is important to keep evidence of the reason for and purpose of such entertainment in case of HMRC queries.

Partly taxable

There will be occasions where there are clearly taxable and non-taxable elements.

Where entertaining or events have multiple elements, each element and event should be considered, to see if an exemption applies or if there is a reason that element is not taxable.

A typical example of where you might need to consider separate elements is in relation to a staff conference that is held at a racecourse, and once the conference is finished, staff can watch the races and be provided with food and drink. You will then need to consider what elements and costs relate to the conference and which elements relate to the entertainment element.

If your firm pays one cost which includes the conference and the entertainment element afterwards, and there was no choice to only pay for the conference, there is no additional cost for the entertainment, so there is no taxable entertainment part. However, if your firm could choose to just pay for the conference, and added on the entertaining element, you would need to consider the entertaining element to determine if that is or isn’t taxable.