Business entertainment expenses: How to manage them

When you consider a 5% increase in customer retention can increase company revenue by 25% to 95%, a few entertainment expenses can make good business sense.


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Imagine the scene: pre-pandemic, you’re taking a new client to lunch after a project kick-off meeting, and you grab the receipt to pay for the meal. Or, the team is working late on an urgent deadline, so you order in pizza to keep up morale.

These scenes may have changed a little in 2020 – it might be more about home delivery and ecommerce vouchers – but the concept of business entertainment expenses remains the same: there will be times when you pick up the bill to smooth a relationship or give people a boost.

When you consider a 5% increase in customer retention can increase company revenue by 25% to 95%, those few entertainment expenses can make good business sense.

And as an added bonus, company entertainment expenses – whether for staff or for clients – can be tax deductible. This can help you to reinvest in the business and reduce the overall tax burden for the company.

Getting into the details: How to manage business entertainment expenses

 

What are business entertainment expenses?

According to the HMRC’s guidelines, business entertainment can involve eating, drinking and “other hospitality”.

It can be “business entertainment” – where you’re discussing a project or maintaining a connection – or it can be “non-business entertainment”, or a social reason for the entertainment.

It’s considered a business entertainment exercise when:

  • Entertainment is provided
  • To a person or people who aren’t employees
  • And it’s provided for free

Staff vs client

HMRC has very strict definitions of who counts as an “employee” for the purpose of claiming VAT on staff entertainment expenses.

An employee must be someone who is on your payroll and being paid a salary. It does not include sub-contractors, nor shareholders who don’t work in the business.

Entertaining anyone else counts as “business entertainment”, and you can’t claim tax relief or VAT on these business entertainment expenses.

Small vs large companies

Sole traders, or a partner in a partnership or LLP, don’t count as an employee and so you can’t claim staff entertainment expenses for entertaining yourself – legally, there’s no difference between you and the business.

Equally important, you can only claim VAT on staff entertainment where your company is registered for VAT. Small businesses that fall under the VAT threshold – currently for companies earning more than £85,000 – can’t claim back tax on entertainment expenses.

What can be claimed as company entertainment expenses?

You can be reimbursed for entertaining expenses tax-free, as long as they are “incurred wholly, necessarily and exclusively in performance of your employment”.

When they are, then the company can reimburse for the cost of any business entertainment tax-free.

Any kind of hospitality can come under the “entertainment” banner, including:

  • Food and drink
  • Accommodation
  • Tickets
  • Use of capital assets, such as aircraft and yachts, for the purpose of entertaining

Are business entertainment expenses tax deductible?

You can’t reclaim VAT costs associated with customer or client entertainment, but most staff entertainment costs are eligible for tax relief and VAT refunds.

When it comes to annual events like the Christmas party or summer BBQ, you’ll need to mind HMRC’s guidelines if you want to claim. The total cannot exceed £150 per head, and the event must be open to all members of staff.

It won’t be considered a “qualifying event” if it’s a one-off, or if some employees are left out. The entire cost of the event then becomes a taxable benefit.

It’s important to keep proper records, including receipts, when claiming business entertainment expenses. If you can’t justify the cost to HMRC, it may be disallowed.

What HMRC requires you to report for company expenses

As far as HMRC is concerned, what to report and pay depends on the type of entertainment, and who arranges and pays for it.

  • Business entertainment for clients: You must report the cost, and you don’t have to deduct or pay any tax or National Insurance (NI)
  • The company arranges and pays for the entertainment directly: You must report the cost and pay Class 1A NI on the value of the benefit
  • An employee arranges the entertainment and you pay the bill: You must report the cost, and add the full cost to the employee’s earnings and deduct NI through payroll
  • An employee arranges and pays, but you reimburse them: The amount you reimburse will count as earnings, to you must add it to payroll and deduct both PAYE and NI

If you’re unsure whether a particular business entertainment expense is exempt of tax, play safe and discuss it with HMRC or your accountant.

 

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