Entertainment Expenses: The Complete Guide

Chapter 1

Why entertainment is important in business

The old adage around entertainment expenses goes that there’s no such thing as a free lunch.

Yes, clients and partners may raise a smile as you tap your card for the £58.60 bill at Wagamama’s, but they know as well as you do that the hope is that they will repay you in kind at a later date. 

It’s how sales and account management professionals have built fruitful relationships since the dawn of business. However, many HR and finance managers see corporate entertainment culture as, at best, an avoidable loss maker and, at worst, ripe for abuse by over-zealous staff and clients alike.

The fact remains that people like working with and purchasing from people who look after them, who offer them value outside of the boardroom and outside of normal business hours. 

So how can you keep your connections happy, empower your staff and make sure that you aren’t just throwing money away?

In this guide, we will show you how to maximise the potential of your entertainment expenses, avoid the hazards of unsupervised spending and take your business forward.

Show customers you care

According to the Harvard Business Review, it can be 25 times more expensive to bring on a new customer than to keep an existing one.

Treating loyal clients and customers is an extremely effective way of both making them feel valued and preventing their eyes from wandering toward your competitors. This covers everything from picking up the coffee bill at the monthly catch-up to wining and dining them around the festive season.

If you do a few simple sums involving your average cost per acquisition (CPA) and the bill for a leisurely lunch or a few drinks in your city’s trendiest rooftop bar begins to pale into insignificance.

Staying attentive to their needs reassures them that you are here to help, but also circumvents a large chunk of the sales process. 

It’s often easier to up sell an existing client or customer, or offer them a bespoke service, rather than generate new leads. Tapping into existing relationships allows you to create a much faster track to potential conversion. This can represent a significant efficiency gain, particularly across large organisations.

Moreover, regular face-to-face contact outside of the meeting room gives you a valuable opportunity to understand their needs, circumstances and passions. This lets you tailor your service to meet each of them, without second guessing anything.

Reward and empower the team

The value of entertaining in business also strikes much closer to home.

For years, HR managers have accepted the idea that: ‘a happy team is a productive team’, but even more importantly, they are a loyal team.

Teams who feel valued and rewarded have a much higher retention rate and are much less likely to apply for positions elsewhere. An emotionally invested team who feel rewarded for their work are also much more willing to stay late when you’ve got a big deadline to hit and need everyone to pull together.

Schmooze investors, pay the bills

That’s not to mention the possibilities that taking a potential investor for lunch or a few glasses of bubbly can open up for an ambitious start-up looking for their next round of funding or an intro to their next CTO.

There are so many ways in which effective use of dedicated entertainment budgets can help drive businesses forward and keep the coffers looking healthy. Therefore putting systems and budgets in place just for this purpose is central to any  2020 SMB business strategy.

Chapter 2

Client entertainment strategy

The pitfalls

As mentioned before, despite the benefits, the traditional structure and conventions involved in client entertainment present their own set of potential problems.

Sharing the load

It sounds obvious, but only one person can hold a company card at any given time. So, if you have three sales staff, each of whom have working lunches on the same day, one in Manchester, one in Birmingham and one in Glasgow, which of them do you trust with it?

The knock-on effect is that at least two of these team members will have to dip into their own pockets to make sure that the potential customer isn’t left footing their own bill. 

This can impact staff morale and create another level of work for finance staff chasing for receipts to reimburse them.

“I’m sorry but David isn’t in the office today”

Sharing a single company card has always had an inherent logistical flaw. With just a handful of cards to service an entire team, what happens when one of the few senior managers isn’t in the office on a particular day?

This may be just about manageable in a company of fewer than 20 staff, as businesses scale up, the time constraints on senior management inexorably increase. As a result, they may not be on hand to entertain their business network themselves, necessitating delegation to the wider team.

If, however, the CEO or MD aren’t available to hand over their card directly, then the same problem presents itself as above. 

This is among the many reasons why UK companies are now switching over to more modern solutions such as shared expense accounts with prepaid expense cards and virtual company cards.

The working lunch

So you’re finally ready to start planning some meet-ups and sending out staff to meet clients. Where do you actually go and what should you order? The last thing you want when you’re trying to impress or delight someone is to commit a faux pas.

Where to go

There are hundreds of locations up and down the UK offering affordable and memorable daytime and evening dining and activities. You can check out a few of the best entertainment locations near your office are below:

What to eat

Obviously, it’s all subjective and you or your team should check with the other party to see if they have any special dietary requirements, but generally some cuisines are more important than others for a working lunch.

Try to avoid anything too heavy if either party intends to go back to the office afterwards or if you know they have a busy afternoon of meetings ahead. Nobody appreciates being put in a food coma when they have a long to-do list to get through.

Also, generally quicker is better. According to research by Bookatable, 66% of working Brits have seen a decline in business lunches in recent years, with more than a quarter (28%) citing a lack of time and nearly a fifth (19%) blaming staff shortages. 

Look for food items that you know can be ordered and brought out relatively swiftly, or restaurants that offer a specific working lunch menu.

If your food comes quickly, you can always stay and chat after its been cleared away or order coffee. If you’re waiting ages for food to arrive, clients can get antsy or annoyed, particularly if they have a busy afternoon ahead and have to rush to another meeting after wolfing down their shepherd’s pie.

Fresh Mediterannean cuisines and salad-friendly menus are generally safe bets. Plus they have plenty of different options to suit most palettes.

For the best places to take clients for a leisurely London business lunch, check out our guides below:

Client entertainment in large businesses

The pressures on corporate entertainment on a larger budget are often greater when you are dealing with large budgets than when you’re entertaining on a shoestring.

With greater resources to play with and often high status individuals and organisations on the other side of the table/18th tee, expectations can be extremely high. 

Show them you mean business

A croissant and a coffee in the corner cafe will only get you so far. Therefore it pays (often literally) to offer them something a lot more exclusive, spectacular or unusual to show them you’ve gone the extra mile.

As a result, for many big companies, it’s now par for the course to book overnight corporate weekends with high-value account clients or treat them to flights to the San Francisco office. 

Having a solid roster of rooftop bars, exclusive restaurants and luxury hotels is a valuable tool in the corporate entertainment arms race, one that can swing a big ticket contract your way in the future.

Larger budgets, stronger headaches

With larger teams also comes the challenge of keeping track of more client entertainment transactions. As do the inevitable headaches of asking a large group of people to collect, file and log receipts and expense claims correctly. 

Across a major organisation, time lost chasing up individual expense claims across a number of teams can seriously add up, representing a massive efficiency loss across a financial year.

This all makes a streamlined process imperative to making the company finance machine run as smoothly and efficiently as possible. Offering clear communicated entertainment budgets and controlled access to those budgets for relevant teams creates a huge time saving across numerous departments.

These incremental gains can be the difference between hitting company-wide quarterly targets and falling behind.

Client entertainment in smaller businesses, startups and scaleups

Looking after clients or sweetening the deal for potential customers can seem like a daunting and expensive prospect for many SMBs. 

Multinational corporations can offer their network brunch at the Ivy or a box at Old Trafford. Conversely, smaller enterprises with more limited budgets can offer lunch at Pret a Manger and obstructed view tickets at Leyton Orient. 

But don’t be deterred. 

Play the long game

The true value in client entertainment lies in the face-to-face contact, the personal interaction and the level of transparency it shows the people who help pay your bills and pay your staff. 

Showing them you care about their experience outside of the invoicing process can be the difference between getting paid on time and having to chase the finance team for a period of weeks.

Build your own focus group

Much more importantly, though, when you don’t have the time, budget or resources to run extensive customer research or product testing, building a strong network of key clients is a vital tool in shaping a growing business.

Honest, actionable feedback from the people who will actually pay for your product or service is imperative to the growth of any young, scalable business.

Entertaining these people on a regular basis, then responding and reacting to their honest critiques is a key to building this two-way trust dynamic. It may also be the making of you.

Know your audience

It’s also important to recognise the different social demographics in the startup world compared to many of the traditional corporate institutions.

The lower average age of both workforce and senior management in startups is something that shouldn’t be ignored.

This will only become more acute in the coming years. A 2016 report from the Institute of Alcohol Studies showed that alcohol consumption among young people has been on a steady decline for more than a decade. Gen Z as a whole are the soberest age group to enter the workforce in generations, and are steadily working their way up the startup ladder.

In addition, in a 2019 interview with Forbes, the NPD Group revealed that about 12% of Millennials describe themselves as vegetarians or vegans, 11% of boomers, 8% of Gen Xers and 7% of Gen Z.

Times are changing. Not everyone feels at home sipping cocktails in a Soho rooftop or tucking into a ribeye at Gaucho. Get to know your network on a personal level and tailor your client entertainment strategy to fit each of them on a human level.

Making the effort to organise a chat over alcohol-free cocktails or a vegetarian dinner are the personalised touches that make your business stand out and forge a fruitful working relationship.

Chapter 3

Staff Entertainment Strategy

As mentioned above, there’s a long-held belief that happiness breeds productivity.

Indeed, a range of experiments by the University of Warwick Department of Economics found that making team members happy can increase their overall productivity by around 12 percent.

Across a year, or even a month, 12 percent is a massive efficiency gain for any business. One could even argue that maximising your company’s potential rides on keeping office spirits high. It pays to help your team unlock their potential.

So how can you make them happy?

It’s well known that flexible working and higher basic salary are usually effective ways of stimulating staff morale. However, the financial and logistical implications of implementing either on a regular basis are rarely sustainable, regardless of business size or turnover.

This makes your staff entertainment strategy, with entertainment activities and defined staff engagement budgets critically important for raising and maintaining staff spirits. 

Build culture through empowerment

Connections forged over after work drinks or company days out, are where company culture is born. While ‘culture’ has become a massive buzzword, its value to a workforce can’t be understated.

A survey earlier this year by Aviva found that 19 percent of employees cite ‘people and culture’ as a reason why they started/accepted their current job. 26 percent said that it was a major reason why they remained in their job, behind only Salary, Work-life balance and Location.

Moreover, delegating a degree of control over work social activities to the team themselves empowers them to organise events that feel much more connected to the group as a whole, saving senior management time and taking the guesswork out of the equation.

If they need a little inspiration, we’ve put together comprehensive lists of some of the best bars across London to get their creative juices flowing:

There are firms up and down the UK who are taking culture building to a whole new level through staff engagement. London-based Travel Tech startup Impala organise quarterly team building getaways that bring together the company-wide team, usually based across more than five countries, in a central location for almost a week.

The result is a unified group who feel connected to one another, despite spending the vast majority of their time in entirely different countries.

Chapter 4

Entertaining Investors

There’s a lot of money out there

Startup and scale-up investment in the UK is at an all-time high. 

Research by KPMG earlier this year found that £4.4billion in venture capital (VC) money was invested in the UK in the first half of 2019, up 37 percent on the same period the year before.

So with this much money washing around, the opportunity for young companies to fund growth is massive, particularly among angel investors and tech funds.

By the same token however, the level of competition is fiercer than ever. According to City AM and the Centre for Entrepreneurs, more than 660,000 new businesses were registered in the UK in 2018. 

There is more proactive fundraising activity going on than ever. As a result, schmoozing is important. In most cases, you’re asking these people for, at the very least, access to their professional network, at the very most, millions of pounds worth of investment.

Connect with them on a human level

A key driving factor in any successful fundraise is recognising that people invest in people. It may seem clichéd, but some of the most successful startup accelerators in Europe, from Techstars to Rocketspace, have put their faith in teams, then immediately told them to radically rework their business proposition.

The people behind a business are often all a potential investor has to buy into, particularly for an early-stage company whose product is still in development.

In a 2018 Atrium post, actor and serial startup investor Ashton Kutcher said:

Focusing on the (sic) simple goal of identifying and enabling amazing entrepreneurs to create a better tomorrow is the crux of my investment strategy.

Ashton Kutcher 2018, Atrium

Show them who you are, demonstrate your passion and expertise in a relaxed, one-on-one environment. 

Suits and ties can be stifling and formal, whereas a well-made cold brew or a freshly cooked breakfast can be the catalyst for a conversation with a human being, not just an investor.

It’s often the only way you’ll get in front of them

It can be nigh on impossible to pin down high net worth individuals during the working day, particularly those with an extensive investment portfolio. 

Client entertaining, whichever form it takes is about showing VIPs you mean business.

Being dynamic and willing to meet them wherever and whenever suits them and their busy schedule counts for a lot and shows you’re making the effort. People recognise that and are more likely to give you the time of day, whether that’s at 7:30am or 7:30pm.

It’s useful to have breakfast, coffee, lunch, dinner and drinks options in you back pocket at a moment’s notice. An impressive, reliable destination can be the difference between securing your next funding round and not.

Keep existing investors happy

Attracting new investors is only the first half of the story for an ambitious, growing business. Keeping them happy once they are on board is just as important.

When someone puts their finances and/or reputation on the line to back you, the least you can do is look after them. Entertainment is a key component of this.

As mentioned before, these are often incredibly busy people, for whom fitting in even half an hour for a catchup during the working day is a near impossibility. Take them out for lunch, dinner or drinks (whatever suits them) provides a valuable opportunity to keep them abreast of how their investment is fairing, while also showing them you don’t take them for granted.

Face-to-face contact over wine and cheese also gives you a valuable opportunity to tap into their experience and wisdom.

So many angel investors and venture capital funds have a wealth of knowledge around how businesses thrive and how they fall by the wayside. Talking to your backers on a human level is sometimes the only way you will get the whole truth behind past business experiences, good and bad.

Building up this level of emotional credit can count for a lot, particularly if you ever need to drop them a line to ask for their help with another funding round or stakeholder introduction.

Chapter 5

Keeping everything in check

So what does your business need to keep track of when implementing an entertainment expenses strategy, what can you claim back and how do you protect against staff spending getting out of hand?

To VAT or not to VAT

There are very clear rules around claiming client entertainment VAT. Basically, you can’t reclaim any costs associated with customer or client entertainment and as it is not covered by tax relief in the eyes of HMRC.

Staff entertainment VAT, however, is a very different matter. Most costs associated with keeping team morale up, rewarding them for hitting targets or simply giving them a treat for a job well done are eligible for tax relief and VAT refunds.

In the case of events or activities where staff and clients overlap, you can reclaim VAT on the cost of entertaining employees only. In a system without prepaid cards or individually assigned budget tracking, splitting the two is a logistical nightmare.

Trust us, it’s the last thing your finance team want to have to deal with the morning after the Christmas party.

Tax relief

Outside of the VAT implications, when entertaining employees, an event may be eligible for tax relief in your accounts.

A ‘qualifying event’ is not taxable to you or your staff, so long as you organise an event that meets all of the following requirements:

Bear in mind though that if any of these criteria aren’t met, the whole cost of the event becomes taxable. So if you are looking to manage your entertainment budgets, make sure that everyone gets an invite and you don’t go overboard on the bubbly.

Admin and Reimbursement

When declaring client or staff entertainment expenses there are a few hard and fast rules. 

Client entertainment

As far as HMRC are concerned, the process for tax reporting and payment is pretty much the same regardless of whether:

All you need to do is report the cost to HMRC by filling out a P11D form. There’s no need to deduct or pay National Insurance or any other tax.

There are rare exceptions. For instance, a meal with ‘overseas customers’ who were in the country for a matter of hours could legitimately be logged as a ‘business meeting’. As such the input tax could be claimed back on the cost of the meal. 

If you’re unsure as to whether a particular client entertainment expense is tax exempt, play safe and contact HMRC directly.

Staff entertainment

You will still need to fill out a P11D form for employee entertainment activities that you pay for directly. 

As a general rule of thumb, an employee counts as someone on your business payroll who is taking a salary (not including directors). 

In the event that you have organised the activity, you will also need to pay Class 1A National Insurance on the value of the benefit. If an employee arranged the entertainment, you add the cost to their  earnings and take Class 1 National Insurance (but not PAYE tax) off in payroll.

When a member of your team organises and pays for entertainment, your reimbursement counts as part of their earnings. As a result, you don’t need to fill out a P11D, but you do need to:

Protecting against abuse

As uncomfortable a subject as it may be, staff abuse of the entertainment budget has historically been a serious issue in companies of all sizes. 

According to an HR Magazine report, of the £8.8billion that employers reimburse to staff on an annual basis, around £2.1billion is fraudulent. 

Moreover, a 2017 survey of 4,000 UK businesses, commissioned by Soldo, found that more than a third of UK SMBs (36 percent) have to do unnecessary financial detective work at the end of each month to determine who spent money, where they spent it and why.

There are simple ways of controlling this:

Implement simple processes, build out a system and leverage modern fintech to solve long-held problems. Before you know it, connections will become investors, clients will become friends and cold leads will become conversions.

It’s all about making people happy.

To learn more about entertainment expenses or to see how your business can utilise prepaid or virtual cards to manage your budgets, read our prepaid card and company card guides.