Is entertaining allowable for tax?
There are several perks to entertaining, whether the guests are employees or clients. Rewarding staff for their efforts increases loyalty and morale. Likewise, spending time with clients fosters connections that set you apart from the competition.
To manage budgets and prevent inconsistent reporting, it’s crucial to understand what counts as an entertainment expense and what you may deduct from taxes and VAT.
What exactly is a legitimate entertainment expense?
Eating out, drinking alcohol, and other forms of hospitality like accommodation or event tickets are all considered forms of entertainment by HMRC. These are the examples of entertainment:
- Business entertainment – when customers are entertained for the purpose of doing business, building relationships, or discussing projects
- Non-business entertainment – entertaining a client for social reasons
The host, the type of entertainment, and the guests all play a role in deciding what expenses must be reported and paid. It is also important to follow the proper protocols while entertaining staff.
Client or business entertaining includes expenses incurred while entertaining present or prospective clients, as well as anybody who is not an employee. According to HMRC, to qualify as client entertainment, the service must be supplied at no cost to the client.
Is client entertainment tax deductible?
The straightforward response is ‘no’. However, even though HMRC does not consider client entertainment to be a legitimate business expense, it is nevertheless smart to use the corporate credit card to pay for entertaining. You may not be able to deduct the cost for Corporation Tax purposes, but you can instead avoid paying income tax like you would have to if you paid out of your own pocket.
A natural question to ponder is whether entertaining business clients is worth your time and money. It’s up to you to decide. The response usually depends on the nature of your company and the kind of clientele you want to attract. Although there may be no tax or VAT relief for business entertaining, it may help secure new contracts and build lasting relationships with business associates. This implies that the initial investment is, for many company owners, money well spent.
When it comes to staff entertainment, the first thing to understand is what HMRC considers an employee. On the most basic level, the individual in question must be on your company’s payroll and be paid a salary. This implies that you would be unable to claim tax relief for ex-employees, interviewees, subcontractors, or shareholders who no longer work for the company.
Furthermore, because there is no legal distinction between you and the company as a sole trader or a partner in an LLP or partnership, you do not qualify as an employee.
Is staff entertainment tax deductible?
Business owners often see the cost of entertaining staff as a tax-deductible business expense. Expenditure for food, drink, entertainment, venue rental, transportation, and accommodation are all fair game. Companies that are registered for VAT are also entitled to reclaim the VAT paid on appropriate employee entertainment costs.
While there is no hard limit on the amount of deductions that businesses can make, some guidelines apply. The line blurs, for instance, when work associates who also happen to be friends or family members go out to dinner together. The primary consideration is whether the event is being held for legitimate business purposes, and if so, how much money is being spent on it.
It’s also important to remember that an employee is, in theory, required to pay Income Tax on the value of any benefit or perk they receive because of their work. This includes the price tag for any staff entertainment. The company may avoid this by either voluntarily disclosing the party to HMRC or, more commonly, by staying within the parameters of the Annual Party Exemption.
What is The Annual Party Exemption?
The first £150 spent on each employee each year on things like Christmas parties and summer barbecues is free from Income Tax and employer’s National Insurance. In practice, the exemption can be used for multiple events, as long as the total cost per head does not exceed £150 in a single tax year.
The event(s) must be accessible to all staff members to be eligible. It should be noted that none of the expenses can be covered by the exemption if the total cost is more than £150 per person. When there are multiple events throughout the year, the exemption may be applied to any combination of them as long as the sum of all does not exceed £150 per person.
The team at Nichols & Co is here to help businesses of all sizes with a wide range of accounting and tax services, including VAT returns and guidance on recovering VAT on business entertainment. Get in touch with our tax experts today at 020 8850 3300.