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Q: A company wishes to thank a number of key employees of one of its suppliers for their contribution to the completion of a successful project. The intention is to provide them with hospitality at a sporting event or give them a gift, rather than cash, in order to avoid any tax and NICs liabilities. What matters should be considered?
A: Special provision is made in the tax legislation for third-party entertainment, including hospitality. No tax liability arises on the provision of entertainment for an employee, or a member of the employee’s family or household, as long as these three key conditions are met:
1. the person providing the entertainment is not the employer or a person connected with the employer
2. neither the employer nor a person connected with the employer has directly or indirectly procured its provision, and
3. the entertainment is not provided in recognition of, or in anticipation of, particular services performed by the employee in the course of the employment
Assuming, therefore, that the entertainment is provided solely at the initiative of a third party, the real test is whether it is a reward for any “particular” services rendered, for example the completion of an identifiable contract, or the achievement of specific targets.
If so, the entertainment becomes an incentive, is a taxable benefit for the employee, and must either be reported by the third party, or the liabilities met using the Taxed Award Scheme. If, however, the entertainment is intended only to further the general business relationship between the employees and the third party, the statutory condition will be met.
A similar arrangement applies to the provision of ‘eligible gifts’ to employees from third parties. In addition to the three key conditions already defined above for entertainment, the following conditions must be met:
4. the gift is not cash or securities or the use of a service, and
5. the total cost to the donor of all the eligible gifts to the employee during the tax year does not exceed £250 (vat inclusive)
These rules also apply to gift vouchers and the use of a credit card as long as they are only capable of being used to obtain goods.
If the cost of gifts for an employee exceeds £250 in a tax year, tax is due on the full amount, not on the amount that exceeds £250.
The most important consideration, for both entertainment and gifts, is the third party’s motive in providing them. Giving a gift or providing entertainment instead of cash does not, in itself, avoid any tax and NICs liabilities. If the gift is a reward for work performed by certain employees of the supplier as part of their normal duties, it is an incentive and, as a result, a taxable benefit. The third party company should consider settling the employees’ tax and NICs liabilities using the Taxed Award Scheme.
The statutory exemptions allow the provision of gifts and entertainment as a means of expressing general appreciation for business done during the year. As long as the conditions for the exemptions are satisfied and, in particular, there is no direct link between the gift or entertainment and any particular services rendered, there are no tax and NICs liabilities at all.
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