Entertaining can be the fun part of running a business, you can share experiences, food and drink out of the typical work setting. It can help build the team but also relationship with clients.
One of the questions we always get asked by our clients is: Are entertainment costs allowable and can I claim any VAT relief?
In vast majority of 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.
1. Business entertainment does not follow the same tax treatment as employee entertainment.
According to HMRC, entertainment is considered business entertainment when all the following conditions are met:
Entertainment is provided such as (any kind of hospitality as provision of food and drinks,accommodation, concert or theatre tickets, entry to sports events and facilities, entry to clubs and nightclubs, use of capital assets, like aircrafts and yachts for the purpose of entertaining)
Ø It is provided to a person or people who are not employees of your business
Ø The entertainment is provided for free
To determine if business entertainment is an allowable expense you need to consider the business purpose test.
For instance, as per HMRC: “if normal basic food and refreshments such as sandwiches and soft drinks are provided in your office during a meeting to enable the meeting to proceed without interruption, then a private use charge will not apply.” This means that you can deduct the costs as an allowable expense. Same applies to situations where “there is no other alternative than to hold a meeting outside the office.”
However, “hospitality provided following a meeting will not meet the strict business purpose test and neither will hospitality involving the provision of alcohol. Taking a customer to a restaurant is very likely to lead to a private use charge.” This means, you will need to add back any client entertainment before you calculate the corporation tax liability.
Ø What about the VAT treatment? Can I claim VAT on client entertainment?
A company can pay for entertaining of clients or potential clients, but this will not be an allowable deduction for Corporation Tax purposes. The VAT element of entertaining can only be claimed when it relates to staff. It’s still worth paying from the company, 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 it is an existing customer, a potential customer, or any other person who is not an employee.
Ø Can I claim VAT on expenses incurred with entertaining overseas customers?
VAT can be reclaimed for the cost of entertaining overseas customers if it’s “of a kind and on scale which is reasonable” . In HMRC words, an overseas customer is considered to be any customer not usually resident or carrying on business in the UK. Additionally, if you and your employee's attendance is necessary to entertain overseas customers, you should be able to reclaim the VAT on the incurred costs as well.
You should be aware that you can only claim VAT for costs related to entertaining overseas customers and NOT overseas suppliers or business contracts. You also cannot reclaim VAT on what HMRC considers“corporate hospitality events”, such as golf days, track days, evening meals or trips to night clubs or sporting events.
Ø Can I claim VAT on Entertainment solely for partners or Directors?
If entertainment is provided only for partners or directors, the VAT incurred cannot be reclaimed.
In this instance, the services or goods aren’t considered to be used for a business purpose.
However, when partners or directors attend staff events with employees, you can reclaim the VAT on business entertainment as covered below.
2. Employee entertainment as opposed to Business entertainment, might be allowable for tax relief. However, is it could also be classed as a benefit n kind. Before planning employee entertainment, it’s important you’re aware of when you can claim tax relief or reclaim VAT on employee entertainment.
Ø Can I claim VAT on Expenses incurred for Staff Parties (e.g. Xmas Party, Summer BBQ Party)?
If the total does not exceed £150 per head (and there are no personal tax implications), a limited company can pay for an annual event, and would be allowable for Corporation Tax purposes, if it’s open to all members of staff. The costs incurred can include food, drink, tickets to events,accommodation and taxi fare home. Limited Companies who are standard rated, can reclaim VAT if the costs are applicable to staff. If you have two staff and two guests, you could reclaim 50% of the VAT.
However, if you run a Limited Company and you and your partner are the only directors the rules might differ. For instance, if you have a Summer BBQ Party where you invite another 20 guests (friends), then this might be seen as noncommercial and therefore has the potential to be disallowed as it’s not for business purposes.