The cost of staff entertainment is a tax deductible expense, on the basis that it’s part of the cost incurred in employing the staff. Staff entertainment costs can cover everything from the annual Christmas party or summer BBQ to small gifts (under £50) that recognise professional performance, or life events like birthdays and weddings. Staff entertainment also includes the cost of office teas and coffees, through to staff socials and employee lunches.
Staff entertainment that is not covered by a statutory exemption is a taxable benefit on the employees’ income and must be reported to HMRC. Either on form P11d for each employee concerned, or as part of a PAYE Settlement Agreement.
If you’re the director of a limited company and the only employee, you could claim non-travel related lunch costs under this category, and they would be a tax deductible expense for the business. However, the expenses would be treated as taxable income for the employee and would need to be reported to HMRC on form P11d (benefits and expenses).
If you’re a company director on a higher rate tax, you’d pay 40% tax and 12% National Insurance (NIC) on the expenses. As a lower rate taxpayer, you’d still pay 20% tax and 12% NIC on the expenses. The business would also be liable for Class 1a NIC contribution of 13.8% on the expenses, despite the employee’s personal tax rate.
So although the company would save tax at 19%, the amount of tax and NIC you need to pay as a director would be more than the tax saved – and you’d be worse off.