The tax treatment of employee lunches

Ever wondered about the tax treatment of employee lunches ?

The tax treatment of  employee lunches or a “Directors’ working lunch” are topics that often come up when I am chatting with clients. The client goes out with  directors or staff to discuss business over lunch at a nearby restaurant. No tax problem there, surely, as business was discussed?

HMRC’s view

Unfortunately, HMRC don’t take the same view.  You could be landing your company or your staff with an unexpected tax bill.

In discussing ‘entertaining colleagues from the same organisation’, HMRC say “any meal taken with a work colleague is always likely to be predominantly related to social and personal considerations”.

What that means is that a Benefit in Kind (“BIK”) will arise on the employees concerned.  What’s more, HMRC might even try to disallow the cost in the company’s tax computation. This is especially so if the person doing the entertaining is the company owner.

So there’s no such thing as a free lunch?

Well, HMRC do accept that there might be circumstances where a BIK doesn’t arise.  This could be a lunch where changes to an employment contract are being discussed, for example. But these are very much the exceptions.

There is some good news!

HMRC  accept that where food is provided in the office during an in-house training session or at a conference centre, then this doesn’t constitute a BIK. Here, the location supports the case that the food is to the business purpose.

What about workplace canteens?

HMRC accept that there is no BIK where an employee provides free or subsidised food for all staff in a ‘work canteen’ or otherwise on the premises. HMRC don’t accept that meals provided in a pub or restaurant would qualify because it is open to the public. So you could, as a tax free benefit, provide a sandwich lunch for all employees, every day, so long as it is provided in-house.

What about VAT?

Generally, VAT is not recoverable on client entertaining but where staff are involved, the VAT can be recovered.  This would be the same whether the staff entertaininng is or is not considered a BIK.

Can the employer pay the employee’s tax if there is a BIK?

It’s not much of a treat if you take your staff out for lunch and they get a tax bill!  But an employer can pay the tax due on staff BIKs in certain circumstances by way of what is known as a PAYE Settlement Agreement (PSA). If  this is of interest, get in touch for a no obligation discussion.

For more on this or any tax matters, email andrew.carter@continuum-ltd.co.uk