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HMRC internal manual

National Insurance Manual

Class 1 NICs: Expenses and allowances: Entertainment expenses

Regulation 25 and paragraph 9 of Part VIII of Schedule 3 to the Social Security (Contributions) Regulations 2001

Payments to cover entertainment expenses are earnings for the purposes of calculating Class 1 NICs (see NIM02010 for the meaning of “earnings”) and must be included in gross pay unless

  • the entertainment expenses are included in a dispensation for tax purposes as explained in NIM05500, or
  • any part of the payment can be identified as business expenses (see NIM05020).

Example 1

A mayor entertains a visitor by taking him out to dinner. He claims expenses to cover the cost.

The mayor must keep a record of what he has spent and must be able to demonstrate that the expenditure has actually been incurred for business purposes. As long as he satisfies these conditions the expense payment will not be liable for Class 1 NICs.

Example 2

A meeting of a sales team to discuss sales strategy is arranged to be held at a local hotel. The event includes a buffet lunch. The Sales Director instructs the team leader to pay the bill for the event and claim expenses to cover the cost.

There will be no liability for Class 1 NICs as long as the cost of the event is supported by documentary evidence and the employer can demonstrate that the event was for business purposes.

You will need to make a value judgement on what is and what is not reasonable expenditure. The nature of the function, location, prestige, who is being entertained and whether such entertainment is appropriate or reasonable in the circumstances should all be taken into consideration.