Are business lunches tax-free for employees?

Employers need to have a far greater understanding of when employees can and cannot claim for business lunches, say leading tax and advisory firm Blick Rothenberg.

Robert Salter, a client service director specialising in employment tax issues at the firm said: “There has been recent controversy about costs incurred by a government minister in terms of business lunches. It is essential that businesses understand the regulations which apply and when it is possible to argue that business lunches are tax-free for employees.  

He added: “You have to separate the treatment of ‘staff lunches’ from those costs which are incurred on ‘business entertaining’.  In many regards, the tax rules around ‘staff lunches’ are actually more restrictive than those around business entertaining expenditure.”

Robert said: “Staff lunches would typically only be tax-free, if they are regarded as ‘reasonable’, provided via a canteen facility – rather than a restaurant, for example – and are provided to all members of staff (or at least all members of staff in a particular location).”  

He added: “Meals with fine wines provided, only to the most senior employees of an organization, would not be tax-free lunches and such costs would need to be reported as a ‘taxable benefit’ on the employees’ Form P11D.”

Robert said: “One also needs to consider the rules around ‘business entertaining’, when deciding whether a business lunch can be tax-free or not.  In this regard, meals with clients (or potential clients), can potentially be regarded as ‘tax-free’ for the employees if the costs are incurred wholly, exclusively and necessarily in the performance of the duties of employment.”

Robert added: “This can, in practice, be quite a high threshold to meet.  For example, simply meeting a contact for a ‘catch-up’ would not necessarily satisfy the rules if the event were basically a ‘social chat’.  Or alternatively, the costs which are being incurred are unreasonable in the circumstances – e.g., if you spend several thousand pounds on a meal with a very small client, HMRC could – legitimately – ask whether those costs were incurred for commercial reasons or just a ‘hidden way’ of trying to reward an employee with a ‘slap-up meal’.  If it is the latter, HMRC would hold that the costs are in broad terms ‘earnings’ for the individual and should be reported as taxable compensation. “

Robert said: “As with many parts of the UK tax regulations, the rules regarding business lunches – and similar events – can be very complicated and it is easy for businesses to make innocent mistakes re the treatment of these costs.  If they are in doubt as to whether something is ‘tax-free’ or not, it makes sense therefore to discuss it with their advisors.”

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