It is easy to get caught out with entertaining costs. Recently, a new client of ours was caught out by a standard PAYE visit by HMRC as they had fallen foul of HMRC's rules and regulations. It is important you know the rules of entertaining, recruitment companies especially.
The client in question has approximately 20 consultants and, like many other recruitment companies, they have various incentive schemes in place. The company rewards their team regularly and has an annual summer party, Christmas party and a trip to Vegas for those lucky enough to meet their targets. They also have team meetings at the wine bar next door and consultants are encouraged to keep their clients sweet by taking them out for dinner and drinks, as well as meeting their candidates often for a coffee or quick lunch.
So, when HMRC reviewed the payments and expense claims for the consultants and the travel agent invoices, they had a field day:
Firstly, client entertaining can be paid for by the company, but it will not be allowable against your corporation tax. These costs should be shown separately in your bookkeeping system as Client Entertaining, and should not include any staff or candidate expenses.
In regards to candidate expenses for coffees and lunches. These are fine for the company to pay and, if the cost is not excessive, these are an allowable cost and there are no tax consequences on the employee or company. As in my opinion, the cost is wholly and exclusively for a business purpose and allowable as business entertainment due to there being sufficient quid pro quo as per HMRC Business Income Manual BIM45014.
HMRC also allowed the regular team meetings as an allowable cost as the company demonstrated that the meetings were business related and minutes were produced to confirm what was discussed. If the company was not able to produce sufficient evidence then HMRC would have had a good argument to disallow these costs.
However, the cost that HMRC scrutinised, even going back as far as 6 years to recover tax that was not dealt with correctly, was the team rewards. You need to be aware that there is a £150 per person, per annum limit that you can spend on your staff entertaining for any annual staff functions. Staff functions include trips to Vegas for these purposes. So, in this case the summer party cost £60 per head, the Christmas party £100 per head and the Vegas trip £1,500 per head. Consequently, the £150 annual threshold would be used against the most expensive function, being the Christmas party. Therefore, my client should have either declared the £1,560 on the employees P11d and the employee pay the tax at the relevant tax rate, or my client should have declared it on a PAYE Settlement Agreement and paid the tax and employers NIC on behalf of the employee.
As a result of HMRC's scrutiny, the resultant tax for the current tax year totalled £4,500. This wasn't a huge issue, but when HMRC went back 6 years and charged interest on penalties on the underpaid tax, the company got a bill for £30,000, which, as you can imagine, created cashflow problems. Thankfully, HMRC agreed to a payment plan.
The moral of this story is to look at your staff entertaining costs and declare the tax or run the risk of having a large tax bill. HMRC are very aware of staff entertaining in the recruitment industry and it’s easy pickings, so don’t make life easy for them.
If you are unsure if you are declaring costs correctly for your entertaining, contact me at email@example.com.
Raffingers also has a free recruitment, where you can ask any question to firstname.lastname@example.org and a member of our team will be in touch for free advice.