Business Entertainment Expenses – What you can claim?
What is business entertainment?
HMRC is the provision of free or subsidized hospitality or entertainment. The person being entertained may be a potential customer or any other person. You may be unsure if you can reclaim costs from your contracting business.
HMRC has a complex set of rules which determine the tax treatment of entertainment costs- a notorious grey area due to the fact that most scenarios where clients are being entertained also involve providing a benefit to those hosting events.
As a starting point, business entertainment expenses are not allowable for tax purposes. It depends on who is claiming these expenses- you or the company.
What counts as an ‘’entertainment’’ expense?
- ‘business entertainment’ of clients- e.g., discussing a business project or new business connection
- ‘non-business entertainment of clients’- e.g., entertaining a business acquaintance for social reasons
These expenses are not typically deductible against your company profits if they are a true business cost, you (personally) will not be taxed on the benefit of the cost of entertainment.
Can VAT be reclaimed?
Unless you are hosting an event for your employees which is wholly and exclusively for the purpose of the trade, you cannot reclaim VAT on business entertainment. If the event contains both staff and non-staff personnel, you can only reclaim the VAT element on your employee’s costs.
Is it good to put business entertainment expenses through my company?
Entertainment expenses cannot be offset against your company’s Corporation Tax bill, they are a legitimate business expense and represent a more tax-efficient way of paying for entertainment cost rather than using your personal post-tax income.
If you still decide to pay for it from your own pocket you will have to pay income tax on the dividends/salary you extract from your company first.
Annual Party for your company?
You can reclaim one type of entertainment expense back from your company without the need to consult an HMRC tax manual- the costs related to an annual company event, typically the Christmas party. As long as you do not reclaim more than £150 per head.
Director/Employee claiming business entertainment expenses
If you are a director or employee you can be reimbursed for entertaining expenses tax-free, provided they are incurred wholly, necessarily and exclusively in the performance of your employment.
- The company can reimburse the director/employee for the cost of any business entertainment tax-free
- The company can pay the cost of business directly without any tax consequences for the director or employee.
The cost will be taxed on the director/ employee as earnings from their employment to the company. It is very important to keep records when claiming business entertainment expenses if you need to justify the level of expenditure. If you fail to retain supporting information for your claim HMRC may disallow the cost. It may be possible to avoid a tax charge if this expense was a trivial benefit.
Company-claiming business entertainment expenses
- Any business entertainment whether paid for on behalf of or reimbursed by a director or employee is specifically disallowed for corporation tax purposes.
- Staff entertaining is not treated as business entertaining, so it is an allowable deduction for corporation tax purposes. You should show this expense separately in the accounts as it is a staff benefit and therefore a cost of ‘staff welfare’.
What is entertaining?
HMRC say that ‘’entertaining’’ is providing free or subsidized hospitality. Here are examples of what can count as ‘entertaining’:
- Food and drink
- Accommodation- hotels, etc
- Theatre and concert tickets
- Sports events and facilities
- Entry to clubs and nightclubs
- Use of capital assets such as yachts and aircrafts
- Payments made to the third-party business entertainment organizers
- Free samples
- Business Gifts
- When you provide entertainment or hospitality only for the directors or partners of your business.
When your business has no employees other than directors
HMRC says the cost of providing entertainment only to directors or partners doesn’t qualify for tax relief or a VAT deduction. If the directors or partners are travelling away from their normal place of work on a business trip, then any VAT suffered from the cost of travel, accommodation, meals can be reclaimed. The rules for tax relief would mirror this and it also applies to sole traders, partners, and subcontractors who are part of the team and treated as employees.
If you are not sure whether you can claim tax relief or reclaim VAT on a particular cost, you should seek professional advice from an accountant who will be able to advise you.