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It is a common practice for employers to arrange hospitality events to which clients, customers and journalists are invited. It may be as simple as a number of seats at a football match or as lavish as a hospitality tent at Wimbledon. Whatever the arrangement, there are tax liabilities to consider, both for the clients and customers attending and for the employer's staff who attend the event as hosts.
To avoid confusion in the following notes,
- the employer putting on the event is called the "event employer", and
- the employer of the customers attending is called the "direct employer".
In any situation where a tax liability arises for a person attending a hospitality event, the reportable value of the benefit is the total cost of the event, including all accommodation and travel, apportioned appropriately among the number of people attending, including all employees of the event employer. For example, if the total cost of an event is £5,000 and 25 people attend it, there is a potential benefit charge of £200 for each of them, depending on the manner of apportionment.
Clients and customers attending
The position for the clients and customers who are employees or directors of a direct employer is relatively simple. The third-party entertainment exemption, as set out in section 265 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), removes any tax liability where an employee, or a member of the employee’s family or household, is provided with entertainment, including hospitality of any sort, if
- the event employer is not the direct employer, or a person connected with the direct employer,
- the direct employer, or person connected with the direct employer, has not directly or indirectly procured the entertainment, and
- the entertainment is not provided in recognition of particular services performed by the employee in course of the employment, or in anticipation of particular services that are to be performed.
Therefore, as long as the direct employer has not been involved in any way with the event and the entertainment for an employee is only an expression of appreciation for the business relationship and, perhaps, an opportunity to talk business, the event employer does not have to report the entertainment as a benefit for that employee. However, if the entertainment is a reward for, say, the awarding of a specific contract,
- the benefit of the entertainment must be reported on a form P11D by the event employer (not the direct employer), and
- the direct employer, if aware that the employee has attended the event, must answer "Yes" to question 3 of Part 3 of the year-end P35 return.
Self-employed persons who attend the event, such as some journalists, are not within the scope of the employment income rules, so no tax liability arises in their case.
Employees of the event employer
The situation is not, however, straightforward for the employees of the event employer who attend the event. There is no exemption for them as there is for the clients and customers. As a result, the benefit of attending the event must be reported for them all, irrespective of their role at the event. It does not matter whether they attended as the organiser, or as hosts for the event, or were there just for the entertainment - their individual portion of the cost of putting on the event must be reported on form P11D (unless they are a lower-paid employee with an earnings rate of less than £8,500, in which case there is no reportable benefit).
It is up to each of the employees concerned to claim subsequently a deduction from earnings against the amount that has been reported on form P11D. The tax office may decide to allow a deduction if
- the employer is a non-trading business or, if not, if the amount reported has been disallowed against the employer profits.
- the amount reported, had it instead been incurred personally by the employee, would be deductible as business expenses (ITEPA s.365). To be deductible, the general expenses rule requires that the amount be incurred wholly, exclusively and necessarily in the performance of the duties of the employment (ITEPA s.336).
To meet the latter requirement, the employee would have to show that attendance at the event was a requirement of the job and that any enjoyment of the event was only incidental to the reason for attending. Any employee attending just for the entertainment would not be able to claim a deduction of earnings.
Example
An employer arranges a hospitality tent at a cricket match and invites a number of customers and journalists. The total costs incurred in putting on the event are £6,000, including £1,000 spent on accommodation for the guests. The employer disallows the costs against business profits. The numbers attending are 25, i.e. 18 customers, 2 journalists, 3 members of staff who act as hosts throughout the day, and 2 directors who spend the day eating, drinking and watching cricket.
The tax liabilities are
- for the customers, nil, as they benefit from the s.265 exemption
- for the journalists, nil, as they are self-employed and are out of scope of the employment income legislation
- for the hosts, the employer could report a benefit of £240 (i.e. £6000 ÷ 25) for each of them, but decides to reduce it to £200 so as to exclude the effect of the accommodation that was relevant only to the customers
- for the two directors, the employer reports a benefit of £200 for each of them.
The employer would keep records that would explain, for audit purposes, the reasoning behind the apportionment.
The three employees who acted as hosts should make a claim for a deduction of earnings to the full amount of £200. The two directors might try to do the same but, in principle, their claim would be rejected.
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