Date posted: 10th May 2023
Many businesses view entertaining clients and customers as an important part of their marketing budgets, whether as a networking opportunity, a thank you for business or an incentive to attract more business – but what is the tax position?
The rules
The tax rules are clear.
HMRC define entertainment expenses as those costs incurred when providing subsidised or free hospitality to clients or staff. Whether payment for lunch with a customer or tickets for a sporting event – whatever the reason, any cost incurred for entertaining customers is not an allowable expense for tax purposes. The amount can still be paid out of the business bank account as an expense set against income, but it will not be a tax deductible expense.
The only ‘entertaining’ expense that is tax relievable is for the entertaining of staff which can include directors/shareholders or if there is a contractual obligation to provide entertainment.
Whilst entertaining staff is fully tax deductible for both income and corporation tax purposes, there may be benefit in kind implications for the employee. The employee will not be charged a benefit in kind so long as the total annual spend per head is less than £150 (including VAT) and all employees (or all those at one branch or department) are invited to the annual event. Should a benefit arise then personal tax will be payable on the total cost, not just the spend above £150. The business will also be liable to pay Class 1A NIC on the taxable amount.
Businesses usually use this £150 limit to cover some or all of the cost of Christmas parties. However, it can be used for other annual events such as a summer party. The events must be regular rather than ‘one-offs’. Companies with just one director/employee would find it hard to justify £150 a head as tax deductible however those companies with two or more directors should be able to claim. If the cost per head of two events together exceeds the limit (e.g. one being £70 and the other being £90), only one could qualify for the tax relief, with the other being fully taxable.
Reclaiming VAT
Generally, input VAT cannot be claimed on the cost of business entertainment unless relating directly to staff or overseas customers. The VAT rules for staff events are more generous than for direct tax because there is no limit to the amount of input tax that can be recovered. If there is a combination of employees and non-employees at an event, with no hosting function for the employees, then input tax should be apportioned and reclaimed.
Practical point
Should a business host an event where clients and employees attend, making a small charge to non-employees will enable VAT input tax to be claimed because ‘free hospitality’ is not being provided. However, it will mean that a small amount of output VAT will be payable on the money received.
If you have any queries on entertaining tax reliefs, please give us a call.
