Whilst costs relating to entertaining staff and clients are a common cost of doing business, and are perfectly valid to include within your profit and loss account, only certain associated expenditure will be allowed to be deductible for corporation tax and VAT purposes.
HMRC defines entertaining costs as hospitality expenses, these relate to the likes of staff or client lunches and dinners, accommodation, theatre or concert tickets, or entry
to sporting events for entertainment purposes.
However, the rules on what can be claimed (in respect of both VAT and corporation tax) is different for employees and clients.
Company costs related to annual events are tax deductible if they are open to all members of staff and cost no more than £150 for each guest. HMRC deems such occasions to be “qualifying events” and allows for the company to write the cost of these events against their corporation tax bill, as well as allowing them to claim back the VAT on associated expenditure.
Typically, companies utilise this annual allowance for Christmas parties. However, it can also be used for other annual events such as a summer party. These events must be deemed as being regular rather than one offs.
Companies putting on two or more events a year can claim back the cost of these events provided that their cumulative cost does not exceed the £150 allowance per employee in total. If the cost per head of two events together exceeds the limit (i.e. with one being £80 and the other being £90) only one of them would qualify for the tax relief, with the other being fully taxable.
The £150 per employee is calculated by those physically present at the annual events, rather than the number of those who registered or expressed an interest in attending. Additionally, the event needs to be open to all staff members rather than just being for directors or employees from a particular location.
If annual events exceed the £150 allowance per employee, or are not open to all employees, companies then associated costs are taxable, and employers must also report each benefit on a P11D form each staff member attending. Additionally, employees would then also be taxed as individuals on these costs.
Employers may be be able to settle the associated tax liability of employees by entering into a PAYE settlement agreement is the expenditure is relatively minimal.
General Staff Entertaining
Costs relating to internal lunches, staff being taken out for meals or drinks can be an allowable deduction for corporation tax. In order to qualify the expenditure must be incurred wholly and exclusively for the purposes of the trade, and the only people present on related occasions must be employees. If non-employees are present at these events neither VAT or corporation tax can be recovered due to this activity being viewed as business entertaining. Additionally, tax relief and VAT costs also cannot be reclaimed if you are a sole trader, partner in a partnership, director or LLP due to you not being classed as an employee.
Client entertaining costs, such as taking a new or potential customer out for a fancy meal or to a sporting event, cannot be used to reduce your corporation tax bill, and cannot have associated VAT costs claimed. These types of costs have the same treatment if they are incurred by anyone at the company other than employees.
If you operate as a one-person limited company, with yourself as the sole director, it will still be worth putting these costs through the company as this will result in an income tax saving which you would have to incur if you withdrew these funds personally.
We can assist you with the associated expenditure of entertaining staff and clients. We are chartered accountants and tax advisors with offices in the Midlands and in London. Our local offices provide support to local businesses with sound tax and accounting advice and good local economic knowledge, talk to our teams in Northampton, Daventry, Rugby and London.