Entertainment is an enjoyable, and often necessary, aspect of running a successful business.
In fact, when you take into account that 'increasing customer retention rates by 5% increases profits by 25% to 95%', the positive impact business entertainment can have in terms of maintaining professional relationships is evident.
That said, whether this is taking an important client out to lunch to celebrate a huge milestone, or throwing an end-of-year party to boost employee morale – entertainment can certainly eat into your company’s budget.
So, can you claim entertainment as a business expense? And if so, which business entertainment expenses are tax deductible?
Keep reading to find out.
Table of Contents
- What Counts as Business Entertainment Expenses?
- Client Entertainment Definition & Rules
- Is Client Entertainment Tax Deductible?
- Staff Entertainment Definition & Rules
- Which Business Entertainment Expenses Are Tax Deductible?
- ExpenseIn Can Help Keep Track of Your Business Entertainment Expenses
What Counts as Business Entertainment Expenses?
The two examples above are classed as business entertainment expenses, but they’re both treated very differently from a tax point of view. It’s therefore very important that you understand how entertainment expenses are evaluated by HMRC.
HMRC has a particular and often complex set of rules for the treatment of business entertainment expenses.
In short, for an expense to be classed as an entertainment expense, HMRC stipulate that 'eating, drinking and other hospitality' must be involved, such as the provision of accommodation or tickets to an event.
What to report and how much to pay is determined by the sort of entertainment, who organises it, and who attends it, however. This means that client entertainment and staff entertainment have their own set of regulations that need to be followed.
Client Entertainment Definition & Rules
So, what are the rules around entertaining your clients? HMRC defines entertainment as “business entertainment” when it is provided free of charge to people who are not current employees of your business.
Client entertainment can be broken down into two categories:
‘Business entertainment of clients’, which includes providing hospitality while discussing a business project or maintaining a client relationship.
‘Non-business entertainment of clients’, which involves providing hospitality to a business acquaintance for social reasons.
Is Client Entertainment Tax Deductible?
In a nutshell, no, client entertainment is 'not allowable as a deduction against profits'. This means that you will need to add the expenses back to your profit when calculating corporation tax. You also won’t be able to claim any VAT back from the expenses either. Whether you’re discussing a project with your client over coffee, or having a meal with a prospective customer, the same rules still apply.
It is, nevertheless, still possible to make client entertainment expenses more tax efficient. One important thing to remember is to always pay through a business, rather than a personal, account when entertaining clients. While the expense is not deductible for Corporation Tax purposes, you will save the income tax you would have paid if you had withdrawn the funds to pay the expenses personally.
Staff Entertainment Definition & Rules
When it comes to the entertainment of staff within your company, there is a very different set of rules. Before we delve into these, we must first examine what constitutes an employee, according to HMRC.
An employee is someone who is on your company’s payroll and is paid a salary. Therefore, this doesn’t include past employees, subcontractors, volunteers, and shareholders who don’t work within the business.
If you entertain anyone other than your employees, it’s considered business entertainment, rather than staff entertainment. As we mentioned in the previous section, you cannot claim tax reduction or VAT on the expense of entertaining clients or anyone who isn’t a current employee.
It’s also worth mentioning that if you’re a sole trader, or a partner in a partnership or an LLP, you do not count as an employee because there is no legal distinction between you and the business. Therefore, you cannot claim tax reduction or VAT on the expense of entertaining yourself.
Which Business Entertainment Expenses Are Tax Deductible?
If you arrange an annual event—such as a summer picnic or Christmas party—that’s accessible to all employees and costs less than £150 per guest attending, this is considered a “qualifying event” by HMRC and is not a taxable benefit for your employees.
However, if any of these three requirements are not satisfied, the entire cost of the event becomes taxable:
If it’s a one-time meal, such as to celebrate a new contract
If certain staff members are excluded
If the cost per head exceeds £150
The rules surrounding business entertainment expenses can be complicated, and often leave many business owners feeling confused. If you’re unsure whether you may claim tax relief or reclaim VAT on a specific expense, you should seek expert guidance from an accountant.
ExpenseIn Can Help Keep Track of Your Business Entertainment Expenses
ExpenseIn helps to reduce the burden of admin around business entertainment expenses for both clients and employees. Setting categories for expenses, establishing spending limits, and even being able to record attendees at events all help to make life easier when it comes to your tax returns.
