THE summer season of corporate hospitality and staff entertainment could lead to extra tax bills.

That's the warning from Rowena Marsh, Tax Partner with Grant Thornton's Poole office, who says; "Companies need to be aware of the tax bill they may face for entertaining staff or clients. In tax terms, expenses from client hospitality cannot be offset against company profits, while expenses for staff entertainment can. However, it is important not to ignore employees' tax liabilities."

Companies cannot deduct their client entertainment costs when calculating their taxable profits. This summer there will be many companies which will take advantage of the prolonged football calendar with the European Champ-ionships in Portugal in June and July.

By deciding to hire out a venue and provide snacks and refreshments for clients and contacts, businesses will be faced with a tax cost of up to 32.75 per cent on top of the costs of the event.

However, small corporate gifts up to a value of £50 are an exemption to this.

Ms Marsh added; "While giving a client a Euro 2004 wall chart would not incur a tax charge, organising drinks to watch one of the games would give rise to a corporation tax cost."

Entertaining employees is viewed as a 'staff welfare' event and employers can offset expenses for corporation tax purposes. However, what is often overlooked is that employees must meet their own income tax liability, unless the party falls within the annual party exemption and there will be a 12.8% National Insurance cost for the employer.

"If employees had to pay tax to attend an 'office night out', it would have an adverse effect on their attendance, and this ignores the logistical difficulties in identifying who was present, and who consumed what. The realistic solution is for employers to pay their employees' tax bill by way of a PAYE settlement agreement. However, what is not well-known is that there is a massive cost involved for the employer."

"Staff parties are popular methods of motivating employees and creating goodwill. But such activities can be expensive and the additional tax costs prohibitive and confusing.

"Companies should establish a PAYE settlement agreement with the Inland Revenue to avoid costs for their employees."