Many businesses view entertaining clients and customers to be 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 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 tax deductible. The only ‘entertaining’ expense allowed is for the entertaining of staff which can include directors/shareholders. The situation is different for costs incurred in entertaining overseas customers/clients as such expenses are income and corporation tax deductible so long as carried out at a reasonable scale and undertaken for business purposes only..
One key point to remember when taking clients out is always to pay through the business rather than through personal bank accounts. This is because whilst the expense may not be an allowable deduction for corporation tax purposes, paying via the company will save the income tax charge that would otherwise be payable on withdrawing the funds (particularly if you are a higher rate director taxpayer).
In comparison, entertaining staff is fully tax deductible for both income and corporation tax purposes. The employee will not be charged a benefit in kind so long as the total spend per head is less than £150 annually (including VAT) and all employees (or all those at one branch or department) are invited to the event. Should a benefit arise then tax will be payable on the total cost, not just the spend above £150. However, this amount is doubled should the employee bring a guest. 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.
An alternative exemption to the £150 limit can be found under the trivial benefits rules. The benefit will be exempt from tax if the cost of providing the benefit does not exceed £50 (or the average cost per employee if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person).
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.
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. As ever the paper trail is key.
Partner note: EIM21865 and EIM 21690; s 264 and 323A ITEPA 2003 BIM45000; s45 ITTOIA 2005; s1298 CTA 2009