Employees beware the tax trap
When a company spends money on entertaining and providing gifts to customers, both home and abroad, that expenditure is disallowed for corporation tax purposes. Gifts however that are not food, drink, tobacco or gift vouchers that carry a conspicuous advertisement and cost no more than £50 per person in each accounting period will be allowed. For example, a pocket diary with the company’s name embossed on it would be allowable.
Where the entertainment or gift is of a kind which it is the company’s business to provide and is so provided in the order course of business with a view to advertise to the public generally, then the related expenditure will not be disallowed.
The cost of staff entertaining will be allowed in calculating the company’s taxable profits provided it is incurred wholly and exclusively for the purposes of the trade. A word of caution however, as staff entertaining could result in a tax and NIC charge on employees earning £8,500 or more p.a and directors under the benefits code, unless the conditions for staff entertaining are met and the expenditure in a tax year does not exceed £150 per head.
Illustration 1 – Normal Business Entertaining
Finders Keepers Ltd, an agency, invites all of their major clients to the Recruitment Agency Expo in Birmingham each year. The company expects its staff to attend in order that they may network.
This situation is straightforward and classed as normal business entertaining.
Whilst the company will not be able to claim tax relief in respect of the expenditure, the employees on the other hand will not incur a benefit-in-kind as the main purpose is to entertain clients.
The entertainment rules also apply to incidental costs. So, in the above illustration, the employees may be reimbursed their costs for travelling to the event, without tax consequences, provided they can demonstrate they were attending in the course of their work. Such costs are not an allowable corporation tax deduction and must be identified to prevent the expense being claimed as such.
Illustration 2 – Incidental Entertaining
Booze Up Ltd, a micro-brewery, host an event for their customers which includes a tour around their brewery showing how their beers are produced, a tasting and a pie and chip supper.
This will not count as entertaining as it is a demonstration and the entertaining is incidental to an allowable purpose.
Illustration 3 – Sporting Events
Cheatham and Fleecem Ltd, a large law firm, pay for a corporate box at Villa Park, the home of Aston Villla Football Club. Although primarily used to entertain clients, it is also used for staff meetings, training and hosting seminars.
The cost of the hire of the box must be apportioned between the disallowable entertainment which occurs on match days and the allowable use for the remainder of the time.
Illustration 4 – Reciprocal Arrangements
Three contractor friends, Del, Dave and Rodney, fly out to Munich each year to attend Oktoberfest. They take it in turns to claim the costs of the trip as entertaining on the basis that it is cheaper to suffer a 20% disallowance for corporation tax than pay for it out of their own income. This time around, it is Del’s turn.
This however is a reciprocal arrangement to provide personal benefits and has no business purpose and, as such, a benefit-in-kind will arise. Although corporation tax relief is available, the saving is outweighed by the fact that personal income tax and Class 1A NIC will be charged. Furthermore, if this practice has been going on for a number of years undetected then, once HMRC catch up, interest and penalties will also be charged for incorrect P11D’s.
In this case, it would be better to disallow the cost of a personal benefit as entertaining. Del will then be treated as drawing the cost personally and taxed as though he had taken a dividend.
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