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.
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So, can you claim entertainment as a business expense? And if so, which business entertainment expenses are tax deductible?
Keep reading to find out.
What Counts as Business Entertainment Expenses?
Business entertainment expenses typically involve costs related to “eating, drinking and other hospitality”. These expenses can include:
Meals and drinks: Costs associated with dining or drinking during business meetings or events.
Event tickets: Expenses for providing access to events, such as theatre shows or sports matches.
Accommodation: Providing lodging for business purposes.
The tax rules for business entertainment can vary depending on factors like what the entertainment is, who's planning it, and who's attending.
For example, if you're entertaining clients, there are certain rules you follow, and it's different when you're hosting something for your staff. Each type has specific guidelines that affect your tax reports and the amount of tax you pay.
Client Entertainment: Definition & Rules
What is Client Entertainment According to HMRC?
Client entertainment refers to any form of hospitality provided free of charge to people who are not current employees of your business.
Types of Client Entertainment
Client entertainment can be broken down into two categories:
‘Business entertainment’ of clients: This is when you offer hospitality as part of your work. It could be during a meeting to talk about a project or when you're trying to keep a good relationship with a client. For example, taking a client out for a meal or going to an event together would be business entertainment.
‘Non-business entertainment’ of clients: This kind is for social reasons and doesn't directly relate to business. It's about being hospitable to someone you know through work but not as part of a work meeting or project. An example could be inviting a business acquaintance to a social event just to catch up.
Is Client Entertainment Tax Deductible?
In short, no. According to HMRC’s Business Income Manual, client entertainment costs cannot be deducted from profits for tax purposes.
“With certain exceptions, expenditure on business entertainment or gifts is not allowable as a deduction against profits, even if it is a genuine expense of the trade or business.”
This means you can't reduce your corporation tax by the amount spent on client entertainment.
Also, you can't claim VAT back on these expenses. Whether it's a coffee meeting to discuss a project or a meal with a potential customer, the same rules apply.
How to Optimise Client Entertainment for Tax Efficiency
It’s still possible to make client entertainment expenses more tax efficient though.
While you can't deduct these costs for Corporation Tax, there's a way to handle them more efficiently: Use a business account.
Always pay for client entertainment using your business account, not your personal one. This way, while the expense still isn't deductible, you avoid the additional income tax that would apply if you had used personal funds for these expenses.
Staff Entertainment: Definition & Rules
What is Staff Entertainment According to HMRC?
According to HMRC, an employee is someone who is on your company’s payroll receiving a salary. This definition does not include past employees, subcontractors, volunteers, or shareholders not actively working in the business.
Entertainment of Staff vs. Business Entertainment
Staff entertainment: Involves expenses for entertaining current employees. These expenses have a different tax treatment compared to business entertainment.
Business entertainment: If you entertain anyone who is not a current employee (like clients or subcontractors), it falls under business entertainment. As highlighted earlier, these expenses do not qualify for tax reduction or VAT claims.
If you are a sole trader, a partner in a partnership, or an LLP, you're not considered an 'employee' in the legal sense. This means that any entertainment expenses for yourself cannot be claimed for tax reduction or VAT.
Which Business Entertainment Expenses Are Tax Deductible?
Are Annual Employee Events Tax Deductible?
Events like a summer picnic or Christmas party can be tax-deductible if they meet these criteria:
Open to all employees
Cost less than £150 per guest attending
These types of events are recognised by HMRC as “qualifying events” and do not count as a taxable benefit for your employees.
When Are Entertainment Expenses Taxable?
The entire cost of an event becomes taxable if it fails to meet any of the following conditions:
It's not a recurring annual event but a one-off occasion, like celebrating a new contract.
It's exclusive and not open to all staff members.
The cost per person exceeds £150.
Are Corporate Gifts Tax Deductible?
Generally, corporate gifts are not tax deductible, but there are exceptions.
For instance, if the cost of the gift does not exceed £50 per person per year, it can be classified as a business expense eligible for tax relief. Also, for the gift to be tax deductible, it should be promotional, bearing the company's branding.
It's important to note that some items like tobacco, food, drink, or exchangeable vouchers are not deductible, and gifts considered as entertainment, such as event tickets, are also not tax deductible.
For a comprehensive understanding of corporate gift tax deductions check out our detailed guide on corporate gifts which covers everything you need to know about choosing the right gifts and navigating the tax rules effectively.
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.
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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.
