How to manage my entertainment expenses for the year end?

With the financial year-end approaching, businesses need to carefully consider SARS compliance, particularly regarding entertainment expenses, including Christmas parties, year-end functions, and other costs. Here’s a summary of considerations for businesses as they approach the financial year-end:

1. Christmas Parties and Entertainment Expenses

• Staff-Only Functions: Expenses for events like Christmas parties or year-end functions that are exclusively for employees can often be claimed as tax-deductible under “staff welfare” costs.
• Mixed Events: If the event includes clients, family, or friends, the entertainment portion may be classified as non-deductible. SARS will scrutinize mixed entertainment claims.
• VAT Restrictions: Input VAT on entertainment expenses (including food, drinks, and event costs) cannot be claimed back, even for staff-only functions.

2. Staff Gifts and Bonuses

• Cash Bonuses: Bonuses paid to employees must be included in their payroll and are subject to PAYE (Pay As You Earn) and UIF contributions. These bonuses are deductible for the employer as a business expense.
• Non-Cash Gifts:
  • Gifts like hampers or vouchers provided to staff may be considered a benefit and could trigger fringe benefit tax for employees.
  • Employers need to correctly calculate and report these on the employees’ IRP5 forms.

3. Timing of Deductions

• Ensure that expenses related to the year-end (like events, gifts, or bonuses) are incurred (not just planned) before the financial year-end to be claimable in the current tax year.
• Proper invoices and records are required to validate these expenses.

4. Prepayments and Accruals

• Review prepayments or accruals of expenses carefully. SARS requires that costs are allocated to the correct financial period:
  • If the party or event happens after the year-end, it must not be claimed prematurely.
  • Costs already incurred (like deposits) before year-end are deductible if they meet SARS’ requirements.

5. General SARS Compliance Before Year-End

• Ensure Records Are Accurate:
  • Retain all receipts, invoices, and supporting documentation for deductions.
  • Include detailed records of attendees for year-end functions to justify employee-only entertainment claims.
• Tax Clearance: Ensure the business is compliant with tax returns (VAT, PAYE, provisional tax, and income tax) and has no outstanding balances with SARS.
• Provisional Tax: If applicable, prepare for the second provisional tax payment before the end of February to avoid underpayment penalties.
• Employee Fringe Benefits: Properly classify any year-end gifts, travel allowances, or perks to avoid future SARS audits.

6. Maximize Deductions

• Consider bringing forward other necessary business expenses (office supplies, equipment, or training costs) before year-end to maximize tax-deductible expenses in the current year.

Actionable Tip for Boatwright Consulting:

Create a “Year-End Tax Checklist” or a client guide to help businesses:

1. Plan year-end parties/events tax-efficiently.
2. Manage staff gifts, bonuses, and entertainment costs to comply with SARS.
3. Ensure they’ve addressed provisional tax and deductions before the financial year wraps up.