Entertaining
Expenditure on business entertaining, which HMRC defines as ‘hospitality of any kind’, is usually not an allowable expense for tax. This applies to both companies and sole traders.
Some examples of entertaining include taking out a supplier to lunch, taking a client to a local sports event, or laying on a drinks night at a hotel to drive sales. HMRC will likely view most “networking” as entertaining rather than advertising.
Exceptions
There are some exceptions:
1. Branded gifts that cost less than £50 per person per annum (i.e. branded pens)
2. Expenditure on staff functions; such as an annual staff party of up to £150 per person
3. Trivial benefits on employees up to £50 (£300 annual limit for directors)
4. Staff entertaining (see more below)
Customer/Supplier entertaining
I am taking one of my clients/suppliers out for lunch next week. Can it be claimed as an entertainment expense?
The business can pay for entertainment, but it is not tax deductible. You will not be able to reclaim any VAT if you are registered for VAT, and it will be added back to your profits when calculating tax.
In the case of Celtic Football club v HMRC (1983) the club were successful in claiming the cost of providing hospitality to the visiting team as it was required by UEFA and was equally provided when they played away. Where there is a contractual obligation, the hospitality will be expected and required, meaning it is not free and therefore will be allowable for both VAT and tax.
If the purpose of the entertaining is primarily to provide anyone who is not an employee with something that is both not expected and free then it will be fully disallowed. The presence of a director would not make this partially allowable.
Staff entertaining
Staff entertaining has a slightly different set of rules. VAT is permitted to be recovered, providing the entertainment is wholly for business, reasonable in cost and is for all the employees. It is an allowable expense for tax for both companies and sole traders. An example of this might be a team bonding ten-pin bowling night.
Subsistence is not classified as entertainment, but could be covered by the £50 trivial benefit rules or annual staff party (£150 per head).
On rare occasions an event may be for both employees and customers may be invited along. In the case of KPMG (no.2) VTD (1997) a dance held for both staff and other guests was only allowed 55% of the costs of the event being for the staff element.
VAT claims on staff entertaining will always be restricted if non employees are present.
So should I pay for it personally?
If you are trading through a limited company, using the company card is often tax efficient. This is because any money you take out of the company will then be subject to additional personal taxes, so although the expense will not qualify for corporation tax relief there is often a personal saving to be gained.
For partnerships and sole traders who are taxed on their profits, and not on what they withdraw, there is no benefit derived by paying for business entertaining via their business.
Interaction with subsistence
Contractors who have a limited company can only deduct receipted food expenses. The food in question, of course, must be consumed in a work-related context. You cannot deduct your regular living expenses, but when your work situation obliges you to eat out, when you cannot get home to eat, you may deduct food expenses with receipts.
Dual-purpose rule
If you eat at home or your usual place of business/permanent workplace, the expense meets the dual-purpose rule. The need to eat is not a direct result of being required to work, and HMRC will not allow this expense.
Allowable business subsistence
Subsistence is commonly incurred alongside allowable business travel. To qualify as allowable business travel, you must be required to travel away from your regular place of work in order to deliver your services. This is a grey area, but HMRC are unlikely to regard anywhere within an hour of your home as outside your local area. The further the distance, the more likely HMRC would be to permit it, particularly if you have had to stay overnight away from home.
The expense must be reasonable and must be incurred as a direct result of being required to travel for your work. If you ate out at an expensive restaurant each day, HMRC would call this excessive and deem it a personal expense. Subsistence expenditure incurred shortly after leaving home, or shortly before arriving back home, is disallowed by HMRC, as this spend is deemed to be a personal choice and not necessary.
If you eat with an employee or pay for an employee’s meal, then it is allowable as staff entertainment. An employee means someone on your company payroll and must be reasonable, occasional and in line with the nature of the work being carried out.
Disallowable subsistence - eating with a business associate
If you eat out and share a bill with a business associate or friend, it is deemed to be a personal expense and not allowed.