First, in order to qualify as an employee, a person must be on the business payroll and be paid a salary.
Sole Traders or Partners in an LLP or Partnership don’t count as an employee, as there’s no legal difference between them and the business. Therefore, these costs should be excluded from the business accounts.
Companies can normally claim a deduction for the costs of entertaining Director(s) who are also employees of the company.
'Staff Entertaining' is an allowable business expense and is therefore tax-deductible. Allowable costs include food, drink, entertainment, venue hire, transport and accommodation. Any VAT-registered businesses can also recover VAT incurred on allowable staff entertaining expenditures.
An employee is liable for Income Tax on the value of any 'Benefit-In-Kind (BIK)' provided by their employment, including the cost of any staff entertaining. These should be included on a P11D form and are subject to Income Tax (Employee) and Class 2A NICs (Company).
The 'Annual Party Exemption' exempts staff entertainment from 'Benefit-In-Kind' up to £150 per person per year for an annual staff function (Christmas Party, Summer BBQ). This can include several events as long as the total cost per person does not exceed £150 per year.
'Cash Bonuses' or 'Cash Vouchers' paid to staff will be taxable as extra payroll earnings, subject to Income Tax and National Insurance.
'Gift Cards' (Non-Cash Vouchers), 'Food', 'Drink' or any other 'Gifts' given to employees for occasions such as a Birthday or Christmas can be classed as a 'Trivial Benefit' (see below).
The 'Trivial Benefit Exemption' excludes any benefit(s) from 'Benefit-In-Kind' provided that:
Staff may receive gifts from third parties, such as clients, as a result of their employment. As long as the gift does not exceed £250, it will not be a 'Benefit-In-Kind' for the employee.
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