The rules surrounding entertainment expenses are fairly complicated, so it’s important to be aware of the tax implications and reliefs available to your business before you pay for anything. This will ensure there are no nasty surprises at tax year end.
Here, Joanne Harris, Technical Commercial Manager at Nixon Williams explains more:
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 their simplest form, entertainment expenses are best segmented 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 understand what is deductible against your company’s profits. The type of entertainment will impact upon whether corporation tax relief is available, the ability to reclaim VAT (assuming you are VAT registered on the standard VAT scheme), P11d liability and whether there are personal tax implications for the recipient. The importance of keeping comprehensive records is essential to ensure that you are able to benefit from any tax relief.
The entertainment of employees will always qualify for corporation tax relief if it is wholly and exclusively for the purposes of trade and is not incidental to client entertainment.
It’s essential to know the difference between client and staff entertainment. HMRC suggests asking yourself if, in the absence of clients/customers, the expenditure would still be incurred? If so, this would be regarded as staff entertainment.
In addition to the corporation tax relief available, you are also able to reclaim the VAT on staff entertainment expenses if you are VAT registered on the standard scheme.
However, as with any other employment benefit, there will be tax implications for both the business and the individual. The cost of the benefit will need to be included on a P11d, with class 1A National Insurance paid on the cash value of the benefit at 13.8% by the business. The individual that receives the benefit will also pay personal tax on the cash value of the benefit.
The exception to the above is the provision of annual events. Whether it’s for a Christmas party or an office barbeque, the cost can include food, drink, tickets to events, accommodation and a taxi fare home.
If the criteria are met, expenditure on annual events will qualify for corporation tax relief and VAT reclaim as above, however will not be regarded as a taxable benefit and so there will be no P11d liability or personal tax to pay.
The annual event must meet the following criteria:
- The cost must not exceed £150 per attendee (including VAT). If there are multiple annual events, where the aggregate cost is £150 per attendee or less, the total will still qualify. It is important to note that this is not an allowance, it is a limit. If the cost of providing the event exceeds £150 per head, the full amount will be a taxable benefit.
- The event must be open to all employees. It can be restricted to all employees in a specific location; however, it cannot be restricted to a certain job role, such as just management.
Businesses choosing to entertain directors or partners do not benefit from input tax recovery under ‘staff entertaining’. HMRC take the view that these individuals do not need to be rewarded or motivated with entertainment. However, HMRC do concede that when these individuals attend a staff party, input tax can be recovered in full.
A company can pay to entertain its clients or potential clients, but this will not be an allowable deduction for corporation tax purposes. It is also not possible to reclaim the VAT on this expenditure.
Client entertainment can still be paid by the company rather than personal income, but it’s essential to be sensible when processing these claims. It is also important to note that any expenditure on client entertaining must be reasonable and it should be expected that economic benefits will flow from this investment.
Without question, entertainment expenses can be a complex situation to navigate. However, below is a quick overview of the rules to be aware off to ensure that your company uses entertainment expenses in the most tax-efficient way.
- When buying meals, you can only claim for yourself and any payroll employees providing all the conditions for subsistence are satisfied. You will be able to claim corporation tax relief on this and also VAT if eligible to do so.
- Whilst staff entertainment is deductible against corporation tax and VAT can be reclaimed, there may be a P11d liability and personal tax to consider.
- You should ensure that the cost is reasonable when entertaining clients. You need to keep in mind that this expenditure will not benefit from corporation tax relief and you will not be able to reclaim VAT.
- You can provide staff with a Christmas party or other annual events, providing the average per head limit of £150 is not exceeded across the year.