What is the background?
Providing food and drink to employees can often inadvertently lead to unexpected liabilities for employers. The general rule is that anything an employer gives to an employee is taxable, unless a specific exemption exists to make it non-taxable.
There are a number of situations where either an employer provides food directly to employees, or where employees are reimbursed for the costs of their refreshments and where the expense amounts become taxable.
It is vital that employers can identify those situations correctly, and report any items which are taxable, and ensure that any exemptions are claimed so that the correct amount of tax and National Insurance is paid.
One of the top tax yielding items for Employer Compliance Reviews carried out by HM Revenue and Customs is the tax treatment of food and drink provided to employees by employers.
The distinction between taxable employee entertaining, non-taxable corporate/business entertaining and non-taxable subsistence can be quite confusing and sometimes dependent on the context of each event, meaning that, even for the tax specialist, it is very easy to get things wrong, leading to expensive tax settlements over many tax years.
What is the issue?
There are many events provided to employees, where food and drink is provided and where the employer is required to report as a taxable benefit in kind. Employers then have the choice of whether to add such items to the annual P11D form (where the employee will need to pay tax on the benefit) or gross up the amounts using employees’ marginal rates of tax (which means the employer settles the employees’ tax).
Many employers do not have the processes to identify and capture the correct items as taxable employee entertaining to then report the correct amounts of the taxable benefit or to then pay any associated tax or NIC.
Where HMRC find taxable employee entertaining as part of their Employer Compliance Reviews which have not been reported, the amounts of tax and NIC at stake are often significant and can relate back up to 6 tax years.
Often, employers do not have the records to disprove HMRC’s challenges and cannot demonstrate whether the provision of food and drink to an employee has been correctly identified as being non-taxable subsistence or business entertaining, or is, indeed taxable employee entertaining.
It is common for some of these errors to be identified in financial due diligence reviews, prior to the sale or finance of a business, and can lurk unidentified even after a statutory audit.
What do employers need to consider?
Employers need to consider a number of aspects relating to their processes and procedures as follows:
- Update their expense policies regarding when and where food and drink will be reimbursed or paid for so that employees are aware of the different definitions of food and drink and the implications for tax;
- Ensure that any expenses claim forms, or corporate credit cards, are set up to identify and capture the provision of food and drink to employees;
- Review how the amounts paid for flow through to various nominal codes and are then picked up for reporting purposes;
- Ensure that any business exemptions are applied correctly for subsistence related to business journeys, and for business entertaining;
- Ensure that the Trivial Benefits or annual events exemption has been applied correctly;
- Report any taxable items (including any associated VAT) on either the P11D, or PAYE Settlement Agreement; and
- Carry out an annual review into expenses and benefits to include food and drink to ensure the process is working effectively.
How can UNW help?
UNW’s experienced team has unrivalled experience in helping employers review and then set up their systems and processes to ensure that they are fully compliant.
Our systematic approach towards these reviews helps identify any areas where errors could occur, and most importantly, how the employer can rectify matters for the future.
Often, an employer will appreciate a “mock” HMRC Employer Compliance Review where our specialists can carry out a “friendly” review based on HMRC’s approach towards these types of issues. While the result is often to find areas of weakness, employers often value the proactive approach towards dealing with the issue.
If you need any assistance with the tax implications of reimbursing employees, or expenses in general, please contact:
Employment Taxes Partner
T: 07810 852 362
Employment Taxes Senior Manager
T: 07392 870 199
Employment Taxes Senior Manager
T: 07793 325 690