Shining a spotlight on entertainment expenses

So, you’re entertaining a business acquaintance with a view to securing some new business. The bill can go on your expenses, can’t it?

Well, not necessarily. What can and can’t be allowed is one of the greyest of grey areas within the HMRC’s rules.

As you’d expect with a grey area, the rules are complex. HMRC sees entertaining a business client in two ways – firstly ‘business entertainment’ such as discussing a particular business project or sustaining a business connection; and secondly ‘non-business entertainment’, which covers entertaining a business client on a social basis.

At once you can see the difficulty. Who knows what might grow from that ‘non-business encounter?

What’s entertainment?

Let’s start by defining ‘entertainment’ (or more specifically, having HMRC define it). It says ‘entertaining’ is providing free or subsidised hospitality. These are examples of what can come under the ‘entertaining’ banner:

  • food and drink
  • accommodation (e.g. hotels)
  • theatre and concert tickets
  • sporting events and facilities
  • entry to clubs and nightclubs
  • use of capital assets such as yachts and aircraft
  • payments made to third party business entertainment organisers
  • free samples
  • business gifts
  • when you provide entertainment or hospitality only for the directors or partners of your business

But entertaining people can be fun – and sharing time, food and drink away from the office can build and reinforce working relationships between your employees. As such it’s ‘non-business entertainment, under the So when can you claim tax relief on the cost of entertaining?

If you want to entertain employees, HMRC’s happy about that – so long as they are pukka employees. People who used to work for the company don’t count, and nor do contractors or shareholders. It’s easy to work out who you can legitimately entertain, as far as HMRC is concerned. They have to be on the payroll.

That doesn’t mean you can’t entertain anyone else, of course – but if you do, it counts as ‘business entertaining’, and you’re not allowed to claim tax relief or VAT.

If you’re a sole trader or a partner in an LLP or partnership, you’re not an employee – there’s no difference between you and the company.

When you’re entertaining your employees, this may be allowable for tax relief in your business’s accounts, but it could also be a benefit on which your employees have to pay some tax.

If you’re hosting an annual event such as a summer boat trip or Christmas party, that’s open to all staff and costs less than £150 per guest present, then this is what HMRC call a “qualifying event” and will not be a taxable benefit for your staff.

But if any of these three conditions aren’t met, then the whole cost of the event becomes a taxable benefit – for example if it’s a one-off meal to celebrate a new contract, or if some employees are excluded, or if the cost per head is over £150.

The cost of entertaining employees as a reward for good work, or to keep up morale, is staff entertaining. That’s allowable for tax relief, and you can reclaim any VAT you pay (if you’re registered for VAT, naturally).

However, if your employees are acting as hosts to a group of customers at an event, then that counts as business entertaining and there’s no tax relief or VAT deduction available on any of the cost of the event. Complicated, isn’t it? Remember, tax relief and VAT can be claimed if the purpose of the event is be to entertain employees.

And here’s another complication. If your event includes employees and, for example, their partners, you can claim back the VAT on the cost of entertaining just the employees. You have to calculate how much of the cost was on the employees, and claim back the VAT on that part only.

And finally, what if the entertainment involves only directors? No tax or VAT relief there, unless the entertainment takes place ‘away from their normal place of work on a business trip’. (and that’s true for sole traders, partners, and contractors too). you have been warned.

We hope we’ve made it plain that what to report and pay depends on the type of entertainment, who arranges it, who it’s for, who pays, and even where it is. And because the subject is so complex we’d advise talking to a specialist about it with a specific focus about any area of which you’re unsure.

Picture: Syda Productions | Dreamstime