The rules surrounding entertainment expenses are relatively complicated, so it’s essential to understand the tax implications before you pay for anything.
In this guide, we consider all types of expenses related to entertainment, including how ‘staff events’ (including Christmas parties) are treated for tax purposes.
Entertainment expenses – the basics
Entertaining for business purposes is extremely common regardless of which sector you operate in. It may be surprising to discover that the cost of entertaining clients will not benefit from Corporation Tax relief, and you are unable to recover VAT.
In simple terms, entertainment expenses fall into two categories:
Client entertainment – which must be reasonable and with the intention of generating future revenue
Staff entertainment – which must be wholly and exclusively for the purposes of trade
Defining the type of entertainment is essential to know whether it is deductible against your company’s profits.
It will also determine whether you can reclaim VAT, whether there is a P11D liability, and if there are personal tax implications for those receiving the benefit.
Keeping complete records of what was spent, who attended, and why the event was held is vital to support any claim.
Staff entertainment
The entertainment of employees will normally qualify for Corporation Tax relief if it is wholly and exclusively for the purposes of trade and is not incidental to client entertainment.
HMRC suggests asking a simple test: if clients or customers were not present, would the expenditure still be incurred? If yes, this is staff entertainment.
In addition to Corporation Tax relief, VAT can also be reclaimed on staff entertainment if your business is registered for the standard VAT scheme.
However, staff entertainment may also be treated as a benefit in kind. This means:
The cost of the benefit must be included on the employee’s P11D form.
The business must pay Class 1A National Insurance at a rate of 15% (2025/26 rate) on the cash value of the benefit.
The employee who received the benefit must pay income tax on the same value.
Annual events
There is a significant exception to the general rule regarding staff entertainment.
HMRC allows an exemption for annual events, such as Christmas parties, summer barbecues, or similar functions.
If the conditions are met, the expenditure will qualify for Corporation Tax relief and VAT recovery, and crucially, there will be no P11D liability or personal tax to pay.
The cost must not exceed £150 per attendee (including VAT). This is a limit, not an allowance. If the cost goes even slightly over, the full amount becomes a taxable benefit.
The event must be open to all employees. It can be limited to staff in a particular location but not to a specific group such as only management.
Directors on their own do not count as “staff” for HMRC purposes. However, HMRC does allow input tax recovery if directors attend a genuine staff function open to all.
The £150 per head total can cover the full range of costs – food, drink, tickets, transport, overnight accommodation, even a taxi ride home.
If more than one annual function is held, the exemption can apply to all of them provided the combined cost per head does not exceed £150.
Partners of employees can also be invited, with the same £150 per head limit applying.
You must have genuinely incurred the cost. You cannot simply claim a £150 “cash allowance” from your company.
For most contractors and small companies, this means you can legitimately claim back the cost of an annual staff party, as long as you stick within HMRC’s conditions.
Virtual events
Following COVID-19, HMRC clarified that the exemption also applies to virtual events.
If you hold an online party or gathering for staff and the conditions above are satisfied, the costs can be claimed in the same way.
This exemption remains in the guidance as of September 2025.
Client entertainment
A company can pay to entertain its clients or potential clients, but this will not be an allowable deduction for Corporation Tax. VAT cannot be reclaimed either. The business can cover the cost, but it should be treated as a non-deductible expense.
Client entertainment should also be reasonable. HMRC expects that any such expenditure has a business purpose and is likely to generate future revenue—lavish hospitality with no commercial link risks being challenged.
Mixed entertainment
In practice, some events involve both staff and clients. If this happens, you must carefully separate the costs.
The staff element can qualify for relief (subject to the rules above), but the client element will remain disallowable.
Keeping detailed records is especially important where events are mixed.
VAT and P11D implications
VAT rules vary depending on the type of entertainment:
Staff entertainment: input VAT can normally be reclaimed.
Client entertainment: input VAT cannot be reclaimed.
Directors: HMRC considers that directors do not require motivating by entertainment, so VAT cannot be reclaimed on entertainment solely for them. An exception is made where directors attend a genuine staff function open to all employees.
When staff entertainment does not fall within the annual function exemption, the taxable benefit must be reported on a P11D and both employer and employee will face additional tax/NIC liabilities.
Entertainment expenses – key points
Entertainment expenses can be a tricky area. These practical points will help you avoid mistakes:
When buying meals while travelling for work, you can claim only for yourself and your staff. If conditions for subsistence are met, Corporation Tax relief and VAT recovery are available.
Staff entertainment is deductible and VAT recoverable; however, consider the P11D and personal tax implications if the annual exemption does not apply.
Client entertaining is not deductible for Corporation Tax, and VAT cannot be reclaimed. Only pay for this if there is a genuine commercial reason.
Annual parties or similar events can be claimed, provided the £150 per head rule is met and the event is open to all staff.
Keep records – who attended, what was spent, and the business reason. This evidence will be essential if HMRC ever queries the expense.
