At this time of year our customers often want to ask about entertaining expenses – are they tax deductible? And can the VAT be recovered?
Whilst a full, detailed answer is really beyond the scope of this blog, I’m happy to offer a few pointers. If you’d like some help on this please feel welcome to contact us today.
Are the costs of entertaining clients (or potential clients) deductible against business profits for corporation tax purposes? Generally speaking, the answer is no – they are specifically disallowed under UK tax legislation.
The costs of entertaining your company’s employees, on the other hand, are generally deductible as long as the entertainment is provided wholly and exclusively for business purposes, but consideration must be given to whether any taxable benefits in kind arise which would have NIC implications for the company and Income Tax implications for the individuals.
There is an important exception from the taxable benefits regime for staff parties, provided certain conditions are met. A limited company can pay for an annual event (or events) for employees; provided the event is open to staff generally and the total (accumulated) cost, including VAT, does not exceed £150/ head, no taxable benefit should arise. This is an “all or nothing” threshold so if the total cost exceeds £150/ head then the whole benefit becomes taxable.
Where entertaining costs relate to a mixture of entertaining staff and third parties, an apportionment of costs between the two camps may be necessary for corporation tax purposes, though the employee element of an entertainment cost can still be disallowed altogether if not incurred wholly for business purposes.
What about the VAT position? Input VAT cannot normally be recovered in respect of the costs of entertaining clients, it is known as “blocked” input VAT. There is however a exception to this rule allowing VAT to be recovered on the costs of entertaining overseas customers at a business meeting.
VAT may normally be recovered on the costs of entertaining staff (at least insofar as those costs relate directly to the company’s taxable business activities) and on general employee subsistence costs, including those incurred by directors. Be careful though; if a director is hosting a meal for clients, VAT recovery may be blocked on the entire expense, including on the director’s meal.
As we head into the festive season, do think about how to manage your entertainment arrangements tax effectively. Contact us today for help.