Whether you are taking clients out to dinner or providing your employees with their annual Christmas party, your business will be incurring entertainment expenses. However, even though these two examples are classed as entertainment expenses, they will be treated very differently from a tax point of view. It is therefore very important that you understand how entertainment expenses are evaluated by HMRC.
HMRC have a particular and often complex set of rules for the treatment of entertainment expenses. For an expense to be classed as an entertainment expense, HMRC stipulate that hospitality of some kind is provided, such as the provision of food/drink, accommodation, sporting events etc. So what are the rules around entertaining your clients?
The take home message of client entertaining is that it is not tax deductible; 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. So whether you are discussing a project with your client over coffee, or having a meal with a prospective customer then the same rules still apply.
With staff entertaining there is a very different set of rules. If the event is purely for staff entertainment then this is actually tax deductible and you are able to claim back the VAT. However, it should be noted that if you invite both your employees and clients to an event where they receive entertainment then this will be classed as client entertainment and client entertaining rules will apply. So if you are having a celebratory meal for a project well done then it might be best to keep clients and employees separate from a tax point of view!
HMRC regard staff entertainment expenses as a benefit-in-kind. This is because they are receiving a benefit deemed to have a monetary value that needs to be factored into their income tax. Entertainment expenses will result in an increase to your employer’s National Insurance Contribution, it will also mean that your employees will experience an increase in their income tax. You will need to record the expenses on a p11d form. However, if you would like to avoid the copious admin at the end of the year you can now report benefits-in-kind in accordance with your monthly payroll instead of having to fill out a p11d.
There is, however, one exception and that is if you are providing your employees with an annual party. It can be a Christmas party, a summer BBQ, or even both! There are some rules that you have to adhere to in order to make sure that your party is tax-free and doesn’t have to be recorded on a p11d.
You cannot spend more than £150 per head (includes VAT). To work this out you will need to divide the amount spent on the whole event with the employees that are attending. The whole event includes everything from the venue, food, transport and much more. You aren’t just restricted to one annual party a year if you decide to do a Christmas party and a summer BBQ then you just need to make sure that they do not collectively amount to over £150. This is the magic number because even a pound over this amount will make the whole £150 taxable!
These rules may seem strict and complex, but it is for a reason. Entertainment expenses are an area that could easily be abused if the proper legislation was not in place. ExpenseIn helps to reduce the burden of admin around these expenses. Setting categories for expenses, setting spending limits and even being able to record attendees at events all help to make life easier when it comes to your tax returns.