Can we deduct entertaining expenses?
The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood. The fact that the expenditure is incurred for business purposes does not make it deductible. Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.
What counts as business entertainment?
Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food,drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality, whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.
Examples of business entertaining would include taking a supplier to lunch, taking clients to a day at the races, or inviting them to a box at a rugby match, and suchlike. The definition is wide.
Exception 1: Entertaining employees
One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.
It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.
Exemption 2: Rate of claim and spouse tax exemption
You have £150 (including VAT) to spend per head. This doesn’t have to be limited to employees but can include partners or spouses, as well. To get the total figure per head you need to add up all the party costs, including transport and accommodation, then divide it by the number of attendees. You must make sure you have a receipt for the expenses you are claiming.
An exemption, not an allowance
The £150 spend is an exemption, not an allowance. You will have to actually spend the money in order to make a claim on tax. If it is not used, the exemption will be lost. So if you’re a one-man company, but do not want to go for a festive dinner by yourself, you cannot make a claim for £150 in cash or cash substitute such as shopping vouchers.
If you get a little bit carried away and overspend by even just £10, you can no longer claim the tax exemption on the £150. The overall cost of all events must not exceed £150.00 per head. If it does, the entire cost will be treated as a benefit-in-kind (BIK) and subject to additional tax and NI.
Exception 3: Normal course of trade
The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.
Exception 4: Contractual obligation to provide entertainment
Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.
Exception 5: Small gifts carrying an advert
The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.
Just because entertaining is incurred for business purposes, it does not automatically mean that it is allowable. Business entertaining needs to be added back in the corporation tax computation.
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