Entertaining can cover many things, from a meeting to discuss a new project, to taking valued clients out for a hospitality event or drinks. However, this can be a bit of a muddy area when you are looking to claim these expenses back through your company, so we want to make sure you stay on the right side of HMRC, while also getting the tax deductions you’re entitled to!
Staff entertaining is fully deductible for Corporation Tax and for VAT (as long as you’re VAT registered). Former and previous employees don’t qualify, nor do subcontractors, nor do shareholders who don’t work in the business. From experience, “an employee” must be someone who is on your business’s payroll and being paid a salary.
If you’re entertaining anyone else, that counts as “business entertaining” rather than staff entertaining, and you can’t claim either tax relief or VAT on the cost of entertaining them.
These costs can still be paid via the company, however, these will need to be added back to the profit at the end of the year to ensure the correct amount of taxes are calculated.
If the event is a mixed event for clients and staff, you need to consider the primary purpose of the event. Any event that’s for the purpose of entertaining customers would all be disallowable for tax and VAT. Any event that’s for entertaining staff, you can claim the cost and VAT of entertaining the staff, but not of entertaining the customers. In this instance, be prepared that you may have to divide the cost between two categories, and split the VAT and only claim part of it
Unfortunately, if you’re a sole trader or a partner in a partnership or LLP, you don’t count as an employee because legally there’s no difference between you and the business, and therefore, you can’t claim tax relief or VAT on the cost of entertaining yourself.
What counts as entertaining?
HMRC say that “entertaining” is providing free or subsidised hospitality. Here are examples they give of what can count as “entertaining” – this list is not exhaustive:
- food and drink
- accommodation (e.g. hotels)
- theatre and concert tickets
- sporting events and facilities
- entry to clubs and nightclubs
- use of capital assets such as yachts and aircraft
- payments made to third-party business entertainment organisers
- free samples
- business gifts
- when you provide entertainment or hospitality only for the directors or partners of your business
So what should you do? There are many reasons to entertain your business connections as well as your staff, and these will be far more beneficial to you and your company than purely receiving a tax deduction. Client and staff satisfaction will grow, and hopefully, they will stay loyal to you and your business. Even if you cannot claim back 100% of the costs for the event, you will be strengthening your relationships and you can’t put a price on that!