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Replies to Queries - 4

18 March 2003
Issue: 3899 / Categories:


A partnership pays over £75 per head in a year for a number of employees to attend annual functions. Although it should be shown as a taxable benefit on a P11D or be subject to a pay-as-you-earn settlement, our client wishes the cost to go through the partners' drawings.


A partnership pays over £75 per head in a year for a number of employees to attend annual functions. Although it should be shown as a taxable benefit on a P11D or be subject to a pay-as-you-earn settlement, our client wishes the cost to go through the partners' drawings.

Would an Inspector ask for the partnership's P11Ds to be amended if this came to light in an enquiry and has any reader had experience of this? What do most readers do; agree a PAYE settlement with the Revenue, put the benefit on a P11D, or put the expense through drawings?

I recall that an item in Tax Bulletin stated that the Revenue will no longer permit taxable employee benefits to be added back on a tax computation, but does this include charging the cost to drawings?

(Query T16,175) - Practical Problem.


The fact that the employer wishes the cost to be charged to the partners' drawings does not eliminate tax on the employees. Section 19, Taxes Act 1988 charges income tax under Schedule E in respect of any office or employment on the emoluments therefrom. Benefits provided by third parties are taxable if they are provided by reason of the employment.

If discovered that there were omissions from the forms P11D, the Inland Revenue could impose penalties for incorrect forms and certainly collect the income tax and National Insurance contributions due from the employer, plus of course the interest arising.

If there are a number of functions in a year, firstly it is important to decide how many of them may be covered by Extra-statutory Concession A70B.

Providing the function is open to staff generally and the cost per head including VAT and any transport or accommodation provided by the employer is less than £75, no taxable benefit will arise on the employee. It is important to note that it is the cost per head and not per employee.

For example, where you have three functions costing, £45, £60 and £10 per head, the functions costing £60 and £10 would be exempt from charge as the total costs come below £75 per head.

Where guests attend the function and the cost exceeds £75 per head, then the cost of the guest attendance is also taken into account when computing the cash equivalent value of the benefit. However, if the guests have been invited by the employer for business reasons, the cost of their attendance is not reflected in the cash equivalent value of any benefit assessable on the employees.

For the functions that are not covered by Extra-statutory Concession A70B, then the client could consider entering into a pay-as-you-earn settlement agreement. Such an agreement allows the inclusion of expenses or benefits which are minor or irregular or impractical to include on forms P11D. Functions or parties are considered by the Inland Revenue to be impractical to include on forms P11D and therefore the client could, if he so wished, enter into an agreement to pay the tax on behalf of the employees by this route. The cost is then grossed up by the appropriate tax rates and the employer must pay the resulting liability by 19 October following the end of the tax year in which the event took place.

Alternatively the client could enter the assessable benefits on the employee's form P11D and then the liability would fall on the employees. It is a matter of preference of the employer. - Dennison.


Section 154, Taxes Act 1988 brings into charge under Schedule E benefits in kind provided by reason of employment. Subsection 154(2) specifically includes entertainment within the provisions. The tax treatment through the employer's accounts is irrelevant to this.

Section 168(3), Taxes Act 1988 provides exemption for an employer who is an individual and can prove that he has provided a benefit in the normal course of domestic, family or personal relationships. It is assumed that in 'Practical Problem's' circumstances there is no such relationship between the partners and their employees.

During a PAYE compliance visit, Revenue officers carry out extensive reviews of the employer's records and it is likely that any reference to entertainment expenses will be queried in the review. The provision of entertainment to employees is also a question included in the compliance officers' checklist. When irregularities are found in the application of the benefit in kind rules, the Revenue will assess the employer to income tax and probably National Insurance going back over several years. The partnership will only be able to amend any self-assessment returns still 'open', so it will not be able to claim tax relief on entertainment costs which are now brought into charge.

However, all may not be lost. The question refers to functions, so that, whilst the total expenditure in a year may exceed £75 per head, the cost of one function may be within the limit allowed by Extra-statutory Concession A70(B). If the sum of the costs of more than one function does not exceed £75, the costs of those functions will be exempt from the benefit in kind rules, with only the remaining functions being subject to tax. When calculating the per head cost of functions, it is also important to remember that the cost is allocated between all the attendees, not just the employees.

If the cost still exceeds the £75 limit, it is common practice for employers to settle the tax and National Insurance via a pay-as-you-earn settlement agreement. Although the cost should be included in the employee's P11D, most employers prefer not to in order to avoid inciting ill will against employees. There is a small cashflow advantage in the PAYE settlement agreement, since the liabilities arising out of the agreement are not due for settlement until 19 October, as opposed to 19 July for the Class 1A charge.

For the future, the partnership might like to consider coming to an arrangement with the employees, so that the employees pay for any excess of costs over £75. Alternatively, if employees are permitted to bring guests for whom the employer does not pay the costs, the per head cost of the function is reduced. - Little Bird.

Issue: 3899 / Categories:
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