The tax implications of entertaining can be rather complicated. The following is designed to give some general guidance through the maze of rules in this area.
Businesses
As a general rule ‘business’ entertaining is not allowable as a deduction from taxable business profits even though it may be a genuine business expense. Business entertaining means free or subsidised hospitality of any kind provided to any person other than an employee. It includes incidental costs incurred directly or indirectly in connection with the provision of the hospitality such as travel and accommodation costs.
However, where a trader has a contractual obligation to provide the hospitality and the customer pays for it in full, the cost will be allowable. There must be a direct link between the expenditure incurred and the payment received. Thus, a trader whose business is to provide hospitality for payment can deduct the associated costs of providing that hospitality.
Promotional events arranged for the purpose of publicising a trader’s products are not in themselves business entertaining but the cost of food and drink or other hospitality provided as part of the event is.
Similarly, sponsorship of an event is not entertaining but advertising, therefore it is allowable. However, if the sponsor receives free tickets or other benefits, the value of these is disallowable.
Entertaining of staff is allowable provided it is not merely incidental to the entertaining of non-staff. However, the cost of the entertaining provided by the employer may be a taxable benefit in kind for the employee(s) concerned (see below).
Employees - entertaining costs incurred
An employee who is required for genuine business reasons to entertain customers, suppliers or other business connections in the course of carrying out their duties of employment can claim a tax deduction for those costs provided they are reimbursed by their employer and the employer disallows the cost in calculating its taxable business profits (see above).
The allowable amount includes any amount spent on the employees’ own food and drink whilst entertaining customers or other business contacts.
The amount claimed must be supported with reasonable records of amounts spent on particular occasions.
Entertaining colleagues of the same organization will not normally qualify. Entertaining employees of other companies in the same group may be allowable depending on the circumstances.
Employees – provided with entertainment
If an employee is provided with hospitality of any kind by their employer, they are taxable on the value of the benefit provided. However, there is a limited exemption for an annual party or similar annual function which is available to employees generally. The exemption only applies where the cost per head of the events is less than £150 per year including any incidental expenses.
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Please contact us to find out how the above applies in your circumstances and how you can reduce your tax liabilities and maximise your tax efficiency.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
