The question of what to report and pay differs significantly depending on the type of entertainment, as well as who has arranged and who is then paying for it. Here is a short list of all the possible permutations and how each individual situation should be dealt with:
For the business entertainment of clients you are required to report the cost on form P11D and you are not required to pay any tax or National Insurance. This is the case no matter if 1) you have arranged and paid for the entertainment directly, 2) you are paying a supplier for the entertainment organised by an employee, or 3) you are reimbursing an employee for entertainment expenses made by them.
(Some business entertainment expenses are subject to exemptions meaning that they do not to be included in your end-of-year reports. You can qualify for one of these exemptions if you are paying an expenses flat rate to your employee as part of their general salary or if you are paying back the employee’s actual costs.)
A non-business entertainment that you arrange and pay for must be reported on form P11D and then you pay Class 1A National Insurance based on the value of the benefit.
A non-business entertainment that an employee arranges and you pay for must also be reported on form P11D, and then through payroll you add the full cost to the employee’s earnings and deduct Class 1 National Insurance but not PAYE.
A non-business entertainment that an employee arranges and pays for (but which you then reimburse) should be added to the earnings of the employee in question, followed by you paying PAYE and Class 1 National Insurance through payroll.
On the P11D form there is an entertainment-related box which you should either tick or put a cross in. This is in order that the HMRC know whether to allow your employee to claim a tax deduction for the entertainment expenses provided by you. Place a tick in the box if the cost of the entertainment will be disallowed in your business’ calculations for that year/quarter. Or put a cross in the box if it will not be disallowed.