The subject of classifying food and drink expenditure is a tricky area, not helped by HMRC’s vague guidance on the matter. There are VAT and corporation tax consequences depending on what classification you use so it is important to get it right.
Generally, food and drink expenses incurred by a business can be categorised into one of five headings:
Cost of sale – deductible for corporation tax and VAT reclaimable.
Food and drink can only be classified as a cost of sale if it was expected and agreed as part of a sale. For example if you provide a training event that explicitly includes lunch and drinks. If a supply of food and drink is not explicitly included in the service being bought by the customer it would be business entertainment (defined below).
Subsistence – deductible for corporation tax and VAT reclaimable
HMRC define subsistence as “the reasonable and necessary cost of a meal/snack incurred by an employee whilst undertaking allowable business travel. The travel must occupy the whole or a substantial part of the working day encompassing the normal meal breaks.” Obviously this definition is subject to some interpretation, you should be happy that you could explain to HMRC how the subsistence claims you have made fall within this definition. There is a risk that HMRC could try to reclassify these as staff entertainment which would be taxable on the director or employees.
Staff entertainment – deductible for corporation tax but taxable on the recipient. VAT reclaimable for employee entertainment but not for directors entertainment.
Staff entertainment is the cost of the business paying for food and drink for your staff which does not meet the requirements of subsistence. Examples include buying in lunches to the office or drinks at an after work event. In this scenario the employees would be taxable on the entertainment they have received unless all three of the following conditions are met:
- It’s an annual event, such as a Christmas party or summer barbecue
- The event is open to all of your employees
- The cost per head of the event isn’t more than £150
All other staff entertainment will be taxable of the employee. However there is a threshold under which a benefit like this does not need to be reported
It is possible for an employer to set up a PAYE Settlement Agreement (PSA) with HMRC and pay the tax and national insurance to HMRC rather than the employees having to declare the benefit.
Generally VAT is reclaimable on staff entertainment, unless it relates to the directors, in which case it can only be reclaimed if there is an expectation that the director would attend, such as the annual event scenario mentioned above.
Trivial benefits – staff entertainment may not be taxable on the recipient…
You don’t have to pay tax on a benefit for your employee if all of the following apply:
- it cost £50 or less to provide
- it isn’t cash or a cash voucher
- it isn’t a reward for their work or performance
- it isn’t in the terms of their contract
You can’t receive ‘trivial benefits’ worth more than £300 in a tax year if you’re the director of a ‘close’ company. A close company is a limited company that’s run by 5 or fewer shareholders.
Business entertainment (sometimes referred to as customer entertainment) – not allowable for corporation tax or VAT not reclaimable:
Any food or drink purchased for anyone who is not a staff member counts as business entertainment.
In general, entertainment counts as business related if its purpose is to:
- Discuss a particular business project
- Maintain an existing business connection
- Form a new business connection
- Not staff entertainment
Director’s loan account – not business expenditure
In the event of a director using company funds to purchase food and drink that does not count as subsistence, the payment could instead be assigned to their director loan account, to be repaid by the director in future. The expense is not then classified as a business expense so no tax relief for the company but avoids the potential benefit in kind situation on the director.
As with all of our tax tips and web pages this information is necessarily summarised and of a general nature. If you would like detailed specific advice please contact us.