Out To Lunch

You want to be able to take your staff out for lunch from time to time. Or maybe an employee wants to entertain clients over a meal. You suspect that the Taxman might cause some indigestion. Is there a way to cure it?

Healthy appetite – for tax!

Your top salesman's local restaurant is a great place to do business. He's a regular. Naturally, he meticulously obtains a receipt to prove he's had lunch there. He also pays for it with the company credit cad to avoid a tax liability. So he returns to the office, refreshed and ready for the afternoon's business. Why would the Taxman object to this?

Tax it? The answer is that he wouldn't object at all. In fact he'd positively encourage it. Why? Because he'd look to charge the employee tax on every meal eaten there at the business' expense. As it is regarded as a benefit in kind, he has to pay income tax on it and you, as the employer, would be charged National Insurance at the rate of 12.8% (since April 2003).

What if it were entertaining?

What if your salesman used the restaurant as a place to "do deals"? Better news. Reasonable costs of entertaining customers and suppliers, though not deductible against the company's profits, aren't taxable on the employee (and no NI for you).

Tip. Your employee will need proof of the purpose of the meal. Get him to keep a record of whom he ate with and why.

So what about the staff?

So you can see the general principles involved – the Taxman takes the view that you have to eat to survive and that survival is not a tax-deductible expense! So, for example, you wanted to take your staff to lunch once a month, for a cross between a pep talk and a social gathering. At first glance, the Taxman would say "That's purely a benefit. You must declare the value on each employee's P11D. They'll have to pay tax and you'll be charged NI. And you can't claim the expense against the profit'. Not much of an incentive for a trip to the pub is it?

Tax loophole

There is a loophole that you can exploit. The Taxman has an Extra Statutory Concession that will allow you to take staff to lunch away from work and it not be taxable on any party. To take advantage of the Concession, you'll need to convince the Taxman that it all boils down to "staff welfare" (the way the expense is described in your accounts).

Tip 1. Have a reason for the meals out. Staff appraisals and meetings can be delicate subjects requiring a change of scenery.

Tip 2. Keep records of these off-site "meetings", whom they were with and why they were held.

Who pays?

For the Concession to operate, who pays and where you eat is important. For staff earning less than £8,500, if the restaurant bill is settled directly by the employer, there is no tax to worry about. However for those earning above this sum, it is a little more difficult. The rules say the restaurant etc, must provide a private room for the purposes of staff welfare for it to be tax-free.

Tip. In practice, this shouldn't be too much of a problem. Just ensure that the place you eat has such a room available. If it was booked the last time you took your staff there, the Taxman is hardly likely to create. After all, you used it on every other occasion.

Most forms of staff entertaining are taxable on them and you. However if you use the so-called "staff welfare" loophole by showing the reason for entertaining away from work, the costs should be tax-free.