In most cases, the cost of entertaining is not tax-deductible, and VAT is not recoverable on expenditure. However, the rules are complex, and VAT can be reclaimed in certain circumstances.
Here, our team of tax accountants provide a breakdown of the tax treatment of entertaining clients and employees – including the rules governing staff parties and taking potential clients out for lunch - and discuss if it’s better to pay for these things through the company or out of your own pocket.
The effect of something being disallowable is that the cost does not count towards reducing your taxable profits.
For an allowable expense you can consider this to be the £ value that you spend, less the corporation tax that expense saves you. For example, rent of £10,000 saves you £1,900 in corporation tax, therefore, the net cost is £8,100.
Whereas a client dinner that costs £200, will always cost £200.
So, disallowable expenses of a company are inherently more expensive than allowable ones, however not as expensive as paying for something out of your own pocket.
Anything you spend from the business bank account has not been subject to income tax, and as long as it doesn’t attract a benefit in kind charge will be cheaper than spending personal cash.
A limited company can pay for an annual event, and there are no personal tax implications if the total does not exceed £150 per head.
This doesn’t need to be one event either, just “annual”. So, you could have a Christmas Party and a Summer BBQ, and both would be allowable for Corporation Tax purposes provided the total of both doesn’t exceed the £150 per head limit (if it goes £1 over then the whole amount is a benefit in kind, so tread carefully).
The costs can include food, drink, tickets to events, accommodation and a taxi fare home.
If you’re registered under the flat rate scheme then obviously you can’t reclaim any VAT, but those who are standard rated can reclaim to the extent the costs are applicable to staff. If you have 2 staff and 2 guests, you could therefore reclaim 50% of the VAT.
As with everything when it comes to HMRC, a common sense approach is advised.
If you run a limited company and are the sole employee/director, having a Christmas party where you invite 10 guests (who happen to be your family members or friends) may be seen as uncommercial, and therefore has the potential to be disallowed as it’s not for business purposes.
Your company can pay for entertaining of clients or potential clients, but this will not be an allowable deduction for Corporation Tax purposes.
It’s still worth paying from the company though, as it saves you the income tax you would otherwise pay on withdrawing the funds to pay the costs personally.
It makes no difference if the person being entertained is an existing customer, a potential customer, or any other person who is not an employee.
The VAT element of entertaining can only be claimed when it relates to staff, as detailed above.
Which leads to a further word of caution – if the staff member is acting as a host, and the purpose of the cost was to entertain the client, then no VAT can be reclaimed at all.
When it comes to the grey areas of expense claiming, they don’t come much more clouded than marketing. Let’s take a hypothetical example to illustrate.
You run a door fitting company and your business model runs heavily-reliant on being referred clients by contractors. In your mind, the best marketing strategy for your business is to butter-up these contractors so they recommend your door fitting service to whoever they are building for at that point in time.
What better way to get in the contractor’s good books than by taking them to football matches, fancy steak dinners and buying their wives a few nice handbags, right?
Although this is how you “market” your business, your means are completely entertainment-based and ultimately deemed non-allowable by HMRC and although you’ll most likely have driven business through your strategy, not a single penny of it can be used to claim tax relief. So, what’s the solution?
Primarily, as is always the case with HMRC, it’s using common sense.
Instead of wining and dining the contractors, organise a marketing event in a venue. Set out a programme - have a presentation, highlight a change in HMRC’s legislation that has forced you to change your entertainment approach, include a keynote speaker, and if you want to treat the attendees, have refreshments and beers etc. served at the back of the venue afterwards.
This makes the entertainment one element of your marketing strategy, rather than a sole driver of your strategy’s success. Overall, it gives you the right to claim relief on the event’s expenses.
Corporate boxes are tricky as the treatment of them varies depending on how they are used and who uses them.
As a way to show this, let’s assume a company is buying two corporate package tickets for a prominent London football club at a price of £1,500 + VAT per ticket. What are the VAT, benefit-in-kind, and corporation tax implications should the director of the company take with them (i) a client, or (ii) an employee.
(i) VAT in this situation is not recoverable as it falls into the bracket of business entertainment, while corporation tax is not deductible for the same reason.
Where benefit-in-kind is concerned, there are no implications in this case. The director is performing the duties of employment by entertaining a client.
(ii) It can be argued that the VAT is fully recoverable as this serves as a form of employee entertainment, while corporation tax is an allowable expense under the same ruling.
However, there is a taxable benefit in kind for both the employee and the director (assuming the tax is not settled via a PAYE settlement agreement).