Posted 3 years ago by Tracy
Entertaining, whether staff or clients, has been shown to bring multiple benefits. Rewarding employees for hard work builds loyalty and improves morale, while spending time with clients helps to build and maintain relationships, differentiating you from the competition.
It’s important, however, to know what qualifies as an entertainment expense and what you can claim tax relief and VAT on to ensure budgets are maintained and there are no reporting inconsistencies.
According to HMRC, entertainment can involve eating, drinking and other hospitality such as accommodation or tickets to an event. Types of entertainment include:
What to report and what to pay depends on the type of entertainment, who arranges and who attends. Staff entertainment also has its own rules that need to be considered.
Client or business entertaining covers expense occurred when hosting existing clients, potential clients or anyone else who is not an employee. It must be provided for free to count as client entertaining, according to HMRC. Unfortunately, in most cases, the cost of entertaining is not tax-deductible, nor is VAT on expenditure recoverable. However, it is still possible to make client entertaining spend more tax efficient.
One key thing to remember is that when taking clients out, always pay through the business rather than through personal accounts. While the expense will not be an allowable deduction for Corporation Tax purposes, you will save the income tax you would otherwise pay on withdrawing the funds to pay the costs personally.
On the whole, VAT cannot be reclaimed when it comes to client entertaining, unless you are entertaining overseas customers. Once again, the rules are somewhat complex.
HMRC states that VAT incurred on the entertainment of overseas customers may be recoverable “when incurred for the purpose of the business if it’s reasonable in scale and character”. It adds the caveat that “hospitality provided because it would be polite, because it’s expected, or because it would improve relationships is not for strict business purposes”. There may also be an output tax charge if there is a ‘private benefit’ to the individual enjoying the entertainment, such as attending corporate hospitality events that are unlikely to have strict business purpose.
It should also be noted that you cannot claim for costs related to entertaining overseas suppliers or business contracts.
When it comes to staff entertaining, the first thing to be clear about is what actually constitutes an employee in the eyes of HMRC. At a simple level, the person in question must be on your business’ payroll and be paid a salary. This means you would not be able to claim tax relief for previous employees, interviewees, subcontractors or shareholders who don't actually work in the business.
In addition, if you’re a sole trader or a partner in an LLP or partnership you also don’t count as an employee as there’s no legal difference between you and the business.
Staff entertaining is generally considered to be an allowable business expense and is therefore tax deductible. Allowable costs in this context include food, drink, entertainment, venue hire, transport and overnight accommodation. VAT-registered businesses can also recover VAT incurred on allowable staff entertaining expenditure.
While there is no limit to the amount businesses can claim in this area, there are a few restrictions to be aware of. For example, if people within a business have close relationships or are relatives and dine together this becomes a grey area. The key point is the motive behind the event – it must be for business reasons and expenses must be kept ‘within reason’.
It should also be noted that, in principle, an employee is liable for Income Tax on the value of any benefit provided by their employment, including the cost of any staff entertaining. To avoid this the employer could opt to make a voluntary disclosure to HMRC or a more popular option is to keep within the boundaries of the Annual Party Exemption.
In the UK, expenditure of up to £150 per head on an annual staff function, such as a Christmas party or a summer gathering, can be exempt from both Income Tax charges and employer’s National Insurance. In fact, it doesn’t have to be a single function and several events can be covered by the exemption, so long as the total cost per head does not exceed £150 per tax year.
To benefit from this, the event(s) must be open to all employees. It should be noted that if the total cost exceeds £150 per head, none of the expenditure can be covered by the exemption. However, where there are several events in the year, the exemption can be used on any combination of these so long as the total aggregate cost adds up to no more than £150 per head.
If your business only has directors and no employees, however, the rules change once again.
According to HMRC, the cost of providing entertainment only to directors or partners doesn’t qualify for tax relief or a VAT deduction. However, if this entertainment occurs when those directors are away from their usual place of work, such as on a business trip, then VAT paid on the costs of travel, meals and accommodation can be reclaimed. This means that if a director-only meal took place during a business trip – and, crucially, one that they would have taken anyway – tax relief is possible.
The rules around staff and client entertaining are complex but there are ways to make this expenditure more tax efficient.