Entertainment costs you can and can’t claim
Posted on 4th August 2022
Rewarding employees for their hard work can help build loyalty and improve morale, especially when so many businesses are being faced with The Great Resignation. Spending time with clients helps you to build and maintain relationships and improve retention.
However, not all entertainment expenses are the same when it comes to tax relief and VAT.
What is an entertainment expense?
HMRC says that entertainment can involve eating, drinking and things like accommodation or tickets to an event. This includes:
entertaining business customers while discussing a project or maintaining a business connection
non-business entertainment of your customers to maintain social connections.
What you can claim as a business expense depends on the type of entertainment, who arranges it and who attends.
There are different rules about entertainment for your employees.
Customer entertainment can include hosting existing and potential customers or anyone else who isn’t an employee.
The entertainment must be free and, in most cases, the cost isn’t tax-deductible as an allowable business expense and you can’t recover the VAT either. However, you can make the cost of entertaining customers more tax efficient.
Remember to pay for customer entertainment using your business account rather than using your own money and you will save the tax you would otherwise pay on your personal income.
If you are entertaining customers from overseas HMRC says that VAT may be recoverable ‘when incurred for the purpose of the business if it’s reasonable in scale and character’. However, if you’re providing hospitality because it’s polite, expected, or because it would improve relationships it won’t be accepted as a genuine business expense.
You should also be aware that if your employees attend a corporate hospitality event that’s unlikely to have a strict business purpose, such as joining customers in a box at a football match, they might be taxed on a ‘particular benefit’.
To be regarded as an employee HMRC says that someone must be on your business payroll and be paid a salary. Previous employees, interviewees, subcontractors or shareholders aren’t included, so you won’t be able to claim costs for entertaining them. If you’re a sole trader or a member of a limited liability partnership (LLP) or ordinary partnership you won’t count as an employee.
Generally, entertaining employees is an allowable business expense which is tax deductible. Allowable costs can include food, drink, entertainment, venue hire, transport and overnight accommodation. VAT-registered businesses can also recover the VAT.
However, there are some restrictions. If employees have close relationships or are relatives of the business owners and go out for a meal together this might not be accepted as an allowable expense. It would be difficult to show that it is exclusively for business purposes.
Employees might also be taxed on the value of the entertainment as a benefit of their employment.
Annual Party Exemption
You can spend up to £150 per person on an annual employee function, such as a Christmas party or a summer barbecue which will be exempt from both income tax and employer’s National Insurance (NI). As long as the total per person isn’t more than £150 in the tax year you can hold several events if you wish.
If your business only has directors or partners and no employees the cost of any entertainment won’t qualify for tax relief or a VAT deduction. However, if the entertainment takes place when the directors or partners 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 claimed.
Please get in touch if you would like to know more about allowable business expenses.
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