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November 18th 2019

Entertainment costs and your business - make sure you know what you can claim

Entertaining people can be a very enjoyable part of being in business - as sharing time, food and drink away from the office can help to build and cement working relationships. But when can you claim tax relief on the cost of entertaining someone, and what about VAT?

Here are a few important things to bear in mind when it comes to tax and VAT on entertaining costs.

Who are your employees?

HMRC only allow tax relief and the claiming of VAT on the cost of entertaining your business employees, and they are very strict about who counts as an employee. 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 on your business’s payroll and being paid a wage/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.

If you’re a sole trader, or a partner in a partnership or LLP, remember that 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 is entertaining?

HMRC say that entertaining is providing free or subsidised hospitality. Here are examples they give of what counts 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
  • Free samples
  • Business gifts

Entertaining employees: benefit

When you’re entertaining your employees, this may be allowable for tax relief in your business accounts, but it could also be a benefit on which your employees have to pay some tax.

If you’re hosting an annual event, such as a Christmas party that’s open to all staff and costs less than £150 per guest present, then this is what HMRC call a “qualifying event” and will not be a taxable benefit for your staff. But if any of these conditions aren’t met, then the whole cost of the event becomes a taxable benefit.

Entertaining employees: VAT

The cost of entertaining employees as a reward for good work, or to keep up morale, is staff entertaining, which is allowable for tax relief and on which you can reclaim any VAT you pay.

But if your employees are acting as hosts to a group of customers at an event, then that counts as business entertaining and there’s no tax relief or VAT deduction available on any of the cost of the event.

For tax relief and VAT reclaim to be allowed, the purpose of the event must be to entertain employees.

If there’s an event with a mixed group and the purpose of the event is to entertain everyone equally, then you can claim back the VAT on the cost of entertaining your employees only. For example, if you have a staff Christmas party and allow your employees to bring a friend, you’d have to work out the amount of VAT you paid on the cost of entertaining your employees and only claim that. You can’t claim on the cost of entertaining their friends.

When your business has no employees other than directors

If your business has one or more directors, but no other employees, then the issue becomes more difficult.

HMRC say that the cost of providing entertainment only to directors or partners doesn’t qualify for tax relief or a VAT deduction.

But they also say that if the directors or partners are travelling away from their normal place of work on a business trip, then any VAT suffered on the cost of travel, accommodation and meals can be reclaimed. The rules for tax relief would mirror this, and this also applies to employees, sole traders, partners, and to subcontractors who are part of the team and treated like employees.

So if you want to have a celebration meal for two directors who are the only employees of the business, make sure that the meal takes place away from the usual place of work and as part of a business trip which the directors would have made any way, for example to see a customer.

For further details, contact us today.

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