Eat, drink and be wary

In this season of mists, mellow fruitfulness and office parties, thoughts of what might be under the mistletoe will probably not include a tax bill. But, along with a hangover, the festive party could also bring a tax bill.

In this season of mists, mellow fruitfulness and office parties, thoughts of what might be under the mistletoe will probably not include a tax bill. But, along with a hangover, the festive party could also bring a tax bill.

Why is entertaining taxable?

Entertaining leads to tax penalties - that's the basic thrust of the tax system in the UK. There are exceptions, but anyone planning a function should realise an income tax charge (or income tax or corporation tax disallowance for the business) will almost certainly be hovering. Add in the VAT disallowance that will be lurking and that £100 lunchtime gathering can be up to an equivalent £160+ spend for a business, even before National Insurance Contribution (NIC) has reared its ugly head. Most people are probably unaware that the taxman doesn't approve of entertainment in some way. But tax law says you can't get a tax break for throwing a party. The extra tax cost most often falls on the business, but it can pass to the individual.

OK, so should I cut back on the beanos?

One issue is that entertaining is widely defined as "hospitality of any kind". So it is not just big lunches - it covers taking clients to the rugby or opera. Even overnight accommodation for a consultant or subcontractor could count as entertaining- and disallowable. Better to let the subcontractor pick up the hotel bill (as subsistence) and recharge it (as expenses) perhaps!

I can understand that there shouldn't be a tax break for high-level parties but what about the rest of the company's employees?

There is one chink of light in this gloom. Staff entertaining is OK. So taking staff out to lunch is tax-deductible. There is no problem if those contractors pick up their hotel bill (as subsistence) and charge it back to you as out-of-pocket expenses. The taxman smiles on taking the team out for a party.

Great - all down the pub then, at the boss's expense!

But - and there has to be a but! - behind that smile, the taxman masks something of an evil grin. Hector, the Inland Revenue's avenging angel, is going to get a cut because that office party, or lunch, is going to count as a taxable benefit in kind for the staff who attend. So there will be 22 per cent or 40 per cent tax due. The exceptions are subsistence related or working away from your usual base. Strictly, that working lunch when you and two fellow managers went out to a nice restaurant to discuss appraisals is caught as well. So are those power breakfasts when all the team got together to review the days and weeks ahead.

Suddenly those drinks we had the other evening are coming back to me - surely they are not going to bring me a tax bill?

Well, your employer will usually pick up the tax bill on entertaining and settle it direct with the Inland Revenue. After all, it would seem a bit hard if the staff social brings a tax bill (which would come via a "PAYE settlement agreement".) The costs mount up, especially as NICs are also due. For higher tax rate employees, it can mean the £100 entertaining can cost an extra £87 in tax.

Don't they know it's Christmas?

There is one welcome sign that Hector isn't totally a Scrooge. There is a concession for £75 worth of the annual party - probably at Christmas but it doesn't have to be - with no taxable benefit. That's £75 per head, so it can include partners. However, the Inland Revenue's largesse doesn't stretch too far. I know one large employer that at one stage sent round invites to leaving dos and the like with a note saying "this will result in a benefit in kind which you should record on your tax return". The £75 includes VAT and any related costs such as transport. If your Christmas party crawls over that barrier, the whole cost of the event is taxable.

Hang on a minute - I've just been out to a party, sorry, evening business meeting, with one of my suppliers. They paid for everything. Does this mean I could get hit with a tax bill if I don't keep buying from them?

No, it shouldn't. This is "third party" entertaining. If someone other than your employer (ie a third party) gives you a benefit - that may also be taxable. Normally hospitality won't count in this argument (remember it will have been disallowed on the "entertainer" who will see it as non-staff entertaining). But go beyond this to an outright gift, prize or something similar and there is undoubtedly a taxable benefit looming.

What? I could get a tax bill for that award for customer of the year? And what about the prize I won in the raffle at dinner?

Strictly, it's all taxable and since April this year all gifts will carry an NIC charge as well. But the prize will probably be covered by the donor's entertaining bill we've already discussed. As for the award, the giver will probably pick up the tax bill on the benefit but if they don't your employer could. If all else fails it's down to you. Check your P11D (the record of benefits that your employer gives you in the summer) when it comes.

Oh well, I can have a few drinks at the Christmas party tonight.

Yes, but now you know why there is a limit on the bar at the Christmas party - Hector is watching!

* John Whiting is a Chartered Tax Adviser with PricewaterhouseCoopers