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HMRC internal manual

Business Income Manual

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Specific deductions: entertainment: exceptions: entertainment of employees

S46 Income Tax (Trading and Other Income) Act 2005, S1299 Corporation Tax Act 2009

Staff entertaining is allowable

One of the exceptions to the business entertaining rule concerns the entertainment of employees. Staff entertaining is allowable, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers (see BIM45034). For more information on how to establish the purpose of expenditure, see BIM37050.

Where an employer provides a staff Christmas party, or a sporting event which is open only to employees, the expenditure is not disallowed by the legislation. However, it is still necessary to establish that the expenditure is wholly and exclusively for the purpose of the business.

In practice, the definition of ‘employees’ is extended to include retired members of staff and the partners of existing and past employees. It does not include staff of associated companies or other companies in the same group. However, the costs incurred by a group parent where employees of subsidiary companies attend such an event and where the parent makes an appropriate recharge to the subsidiaries involved are allowable.

Although the expenditure is allowable, the employees themselves may have to pay tax on the entertainment received and the employer will have to report this on form P11D. Further information about the employment income charge to the employee can be found in EIM21670 (meals) and EIM21690 (annual parties and other social functions). However, due to the difficulty in assigning the benefit accurately to the employees, many employers choose to include such items in a PAYE Settlement Agreement (PSA) and pay Income Tax and National Insurance contributions on behalf of the employees (see PSA1050).

In the past, some employers preferred to add back allowable staff entertaining in the computation of their trading profits as an alternative to reporting benefits on forms P11D. You should not adopt this approach because it is incompatible with generally accepted accounting principles and the tax law on deductions.

It is possible for a charge to arise on the employee even where the cost has been disallowed (in whole or in part) to the employer. For instance, if the scale of the entertaining is excessive. You should consider ‘excessive’ entertainment provided to employees in the same light as ‘excessive’ remuneration (see BIM37700 onwards).