Staff entertainment costs: are you aware of the employment tax reporting implications?
Many employers incur staff entertainment costs for their employees without being aware that this may lead to an income tax charge for their employees. Typical examples include an employer providing after-work drinks, staff parties and food and drink at team meetings as a reward for their performance.
Most businesses would not want their employees to suffer the resulting tax and national insurance (NI) charge on such expenses. To avoid this outcome, an employer can enter into a PAYE settlement agreement (PSA) with HMRC to settle the tax and NI liability on behalf of their employees.
The good news is that it is not too late to apply for a PAYE settlement agreement to cover the 2022/23 tax year.
What are PAYE settlement agreements?
A PSA is an agreement between the employer and HMRC not to declare certain benefits and expenses on employees’ P11Ds and for the business to settle the tax and NI instead.
What can be covered?
Generally, only expenses and benefits that are “minor, irregular and impracticable” for tax and NI to be applied can be covered.
Typical examples of this include (but are not limited to) staff entertainment costs covering food, drinks, gifts and private club subscriptions. While tax exemptions exist for certain entertaining, they often do not exempt all staff entertainment costs.
It may also be possible to obtain agreement from HMRC to include other taxable costs, such as taxable home-to-work travel and reimbursed home office equipment costs.
What cannot be covered?
Large benefits such as company cars and cash (including round sum allowances) cannot be included under a PSA. Cash payments need to be reported in the employer’s payroll, and benefits are reported on P11Ds or in the payroll depending on who arranges and pays for the benefit/expense.
How do you get one?
An application can be made online or by post. This will need to specify the type of expenses and benefits that an employer wishes to be covered under a PSA.
Once a PSA has been approved by HMRC, there is no requirement to renew it annually. However, HMRC needs to be informed if the employer wishes to include any additional categories of expenses or benefits.
Is there a deadline to make an application for a PSA?
Yes – the agreement must be reached before 6 July, after the end of the tax year.
What is the reporting process?
A calculation of the tax and NI due on the items included under a PSA should be submitted around July/August after the end of the tax year to allow HMRC time to process the calculation, although there is no statutory deadline.
Given the employer is settling the liability, the tax is “grossed up” in the calculation for this purpose. This means a PSA can be expensive for the employer but is often still the preferred mechanism to report and pay tax on staff entertainment costs due to ease of administration for employer and employee.
When is the tax and NI liability due?
The resulting tax and NI must be paid by the employer by 19 Oct or 22 Oct (if paying electronically) after the end of the tax year.
How we can help
Our employment tax specialists have a wealth of experience in this area. Please reach out to our team of experts if you need more information on reporting of expenses and benefits.