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Don’t worry I’ll put it on expenses! A familiar comment on TV as the high-flying entrepreneur treats their friend to lunch in an expensive restaurant. What you don’t see, is what happens to that receipt later when it gets to their accountant. Many clients are disappointed to discover that the tax rules for entertaining are much less generous in real life.
Business entertainment is the provision of free or subsidised hospitality or entertainment. The person being entertained may be a customer, a potential customer or any other person.
Entertaining can involve eating, drinking, accommodation and other hospitality. It could include tickets for sporting or cultural events, entry to clubs or nightclubs, use of an asset such as a yacht. Entertaining includes subsidised events as well as free events. It can also involve gifts (such as Christmas presents to customers).
It’s fine to have expenses for business entertaining and include them in your accounts. Entertaining is a legitimate and important part of many types of business. It needs to be recognized as business expense in terms of the business profit.
Apart from a few exceptions, there is no tax benefit to be gained from entertaining. Most entertaining expenses are disallowed for VAT, corporation tax and income tax.
Similarly expenses related to the entertaining event are also disallowed. For example travel, meals and accommodation costs to attend an entertaining event.
However if providing hospitality and entertainment is your business trade (or part of your trade) e.g. hotel, restaurant, events company etc. then this is different and expenses are allowable.
Sometimes an element of entertaining is expected as a normal part of a service e.g. a tea or coffee at the hairdresser. That is fine as long as it’s not excessive. It’s assumed to be factored in as part of the cost of the service that’s being provided.
Both entertaining and travel & subsistence costs often involve eating, drinking and accommodation but travel is allowable for tax whereas entertaining is not. So how do you tell them apart?
The main difference is that entertaining involves paying for people who are not business employees such as customers, suppliers or new prospects.
Staff can claim travel and subsistence costs for a trip away from their normal place of work that is necessary for business. This expense is allowable for VAT and for income tax and corporation tax. But if you pay for a non-employee, even if it’s related to business, that cost becomes entertaining.
A hotel stay and overnight meal for an employee on the way to a customer meeting is travel and subsistence. Meeting the customer and paying for lunch is entertaining.
The other thing to think about is whether the costs are directly related to the trade of the business. Meals and accommodation costs for non-employees can sometimes be allowed if they are directly involved in the trade of the business and the cost is not excessive. For example a construction company could pay for the travel expenses for its subcontractors as well as its employees to work on a non-local building project.
There are a few specific situations when entertaining can be included as an expense for tax and these relate to entertaining of business staff and also gifts.
Staff entertaining is all allowable as an expense for tax providing it is wholly and exclusively for the purposes of the trade and is not incidental to entertaining being provided for customers. This is the case for income tax, corporation tax and VAT too.
This means that the main purpose of the expense has to be entertaining the business staff. Business staff means payroll staff and does not include subcontractors and volunteers. If an entertaining expense meets these criteria it’s allowable for tax.
However, businesses need to be careful as too much generosity to their staff can actually be a disadvantage. There’s a limit to how much entertaining staff members receive before it becomes a benefit in kind and is personally taxable for them.
There are also some VAT complications to be wary of.
Businesses can provide an annual party for payroll staff as long as it’s available to all employees (whether as one event or various events across sites) and does not cost more than £150 per head, including VAT.
There can be more than one function e.g. a Christmas party and a summer BBQ, providing the total costs don’t exceed the £150 limit across the year.
This limit includes VAT and covers all costs such as travel to the event and accommodation that may be provided. If staff members bring invited guests, such as family members, then they fall under the £150 limit of the relevant staff member. If the conditions are not met or the £150 limit is exceeded then staff will end up with a taxable benefit for the entertaining event.
Sadly if it’s only directors on the payroll and no other staff, then the exemption doesn’t apply.
Sole traders are not considered employees, so although they can claim for staff, their own costs would not be covered.
Another spanner in the works is that VAT can only be claimed on the employee costs. So if your employees bring guests, although the guest may be covered under the £150 per head limit, you can’t claim the VAT on their costs. This might mean dividing up costs in terms of number of employees and non-employees for your VAT return.
One very odd anomaly is that VAT can be claimed on entertaining overseas customers, as long as it’s a “reasonable” cost. However for corporation tax or income tax purposes the expense would still be disallowed.
Unfortunately not everything in life is neatly clear cut. Some events may be a mixture of business and entertaining. Other events might be entertaining but for a mixture of staff and clients. How should the business deal with these?
For mixed events it’s important to work out what is the main purposes of the event and what is incidental. Is it a work event with some incidental entertaining or a entertaining event with some incidental work?
If it’s primarily a work occasion and entertaining expenses are incidental and very minor, they can usually be included. A basic lunch provided at an office meeting to enable the meeting to carry on without interruption would be OK. Lunch with customers in a restaurant, particularly if alcohol was involved, would not. If entertaining expenses at a work event are significant or substantial, they should be separated out and disallowed.
Similarly, if it’s primarily an entertaining event with a minor work element, the direct work related expenses can be separated and included. This would not include expenses related to employees attending, it would be expenses like an advertising display stand, business leaflets etc.
If it’s an occasion with both employees and guests attending, then you can think about whether the business would still have paid for the event without the guests being there e.g. just for employees. If the event would not have been paid for without the guests then it should be considered to be business entertaining rather than staff entertaining and all expenses (guests and staff) would not be allowable.
This is a very grey area with lots of complexity. I think the general advice for mixed occasions would be to avoid them if possible. If that’s not possible, consider the main purpose of the event and if in doubt, separate out. Don’t forget, your accountant is there to help out and provide advice and guidance on these tricky areas where answers might require a bit more thought or research.
Generally gifts are considered entertaining and not allowed as a taxable expense, but there are a few exceptions.
Free samples of trade goods aren’t considered to be entertaining.
Small gifts of less than £50 (not food, drink, tobacco or a voucher or token) are allowed providing they contain a conspicuous advertisement for the donor. So giving a customer one of your branded golfing umbrellas or a mouse mat is fine and not considered to be entertaining.
Business can also give gifts to staff providing they are less than £50 in value and not cash or a cash voucher. These fall under the trivial benefits exemption and don’t have to be declared as benefits in kind. The gift must not be provided as part of a contractual obligation or in recognition for services or employment duties. The exemption is design to cover things like birthday celebrations, Christmas presents or wedding presents.
The VAT rules on gifts are similar with a £50 annual limit on business gifts whether to customers or employees. Any more than this and the gift has to be treated as if it was a sale for VAT purposes.
Although the rules on entertaining are covered by a number of different areas of legislation and various HMRC manuals, they are actually pretty consistent across VAT, corporation tax and income tax. There are some differences or clarifications in relation to particular taxes. However overall the outcome is usually the same.
Generally you should consider that if a particular expense is disallowed as entertaining for one tax, then it would also be disallowed for the others as this will most often be the case.
There are exceptions of course (nothing in tax is ever 100% straightforward) and this article can only give a brief overview. So if your business does have a particular situation where more complex tax treatment may apply or you need further advice or clarification, this is something that your accountant can help you with. If you’d like to chat to us about this then just send an email to tax@cooperfaure.co.uk.
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