If you thought the saying ‘there’s no such thing as a free lunch’ didn’t apply to the business world, think again – because, although entertaining staff and client on the company dime is common practice in some industries, these activities are not always tax deductible.
It’s not that corporate entertaining is frowned upon; indeed, it’s often an effective way of doing business, and it’s expected that you should report such expenditure within your profit and loss accounts. However, there are strict rules regarding what is claimable from a tax perspective, and these rules vary depending on whether you are dealing with clients or staff (both in terms of VAT and corporate tax). It’s worth seeking specialist tax advice if staff entertaining is something you are considering for your business – but do keep reading for a helpful overview of the major implications.
‘Staff’ – Who Qualifies?
When it comes to entertaining staff and clients, the bottom line is this: tax relief and VAT claims can only be made in relation to the cost of entertaining business employees – not clients. Furthermore, HMRC have stringent rules in place regarding who qualifies as a member of staff. An employee should be on the payroll of your business and being paid a regular salary. Former employees, contractors and shareholders (who are not otherwise employed in the business) do not qualify.
If you entertain an individual who does not count as staff, the activity would be classed as ‘business entertaining’ – a practice which is not tax deductible.
‘Entertaining’ – What Does This Mean?
Entertainment involves the provision of subsidised – or free – hospitality. HMRC give a few examples of what would be classed as ‘entertaining’, which are summarised below:
· Theatre/concert tickets; nightclub/club entry
· Food and drink
· Use of assets (a company jet, for instance)
· Samples and gifts
What is Deductible? Staff Events
Regular events, provided that they are open to all staff members and cost no more than £150 per head, are tax deductible, and can be written off against the company’s corporation tax bill. You can also claim back any VAT paid in the course of running such an event. Companies often make use of this provision for Christmas parties, but it does not need to be limited to such – it can be used for any other annual event. The only stipulations are that if you are entertaining staff, it must not be a one-off, and that the cost of £150 per head must not be exceeded (so, for example, if a company was to run two events, and the cost of each was £70 per head, both would be tax deductible – however, if one was £75 and the other £85, the limit would have been exceeded, and only one event would qualify for tax relief). In addition, the £150 per head figure relates only to those members of staff who are physically present, rather than the number of individuals that have been invited – something to take careful note of when holding such events.
Should the cost of staff events exceed the allowance, employers are required to report each benefit (for each individual employee) via a P11D form. This means that employees would be taxed as individuals on these costs – an unappealing prospect for most employees, and one we would recommend avoiding.
What is Deductible? General Staff Entertaining
Should you wish to take members of staff out for lunch or drinks, or cater an internal luncheon within the office, the expense can also be deducted from your company’s corporation tax bill. However, in order to qualify for this benefit, the cost must be incurred solely for the purposes of trade, meaning that only employees can be present. Such reliefs are not available for sole traders, directors, LLPs or partners in a partnership.
Is Client Entertaining Deductible?
Though taking a client to a meal, sporting event, or even to the theatre can be a valuable exercise for networking and the building of relationships, the costs are unfortunately not tax deductible (or eligible for VAT claims). Entertaining any individual other than an employee must be treated in the same way: recorded as a business expense, but added back into your taxable profit when submitting returns.
If you’re considering holding an event that involves both customers and staff, you would need to structure the activity carefully to avoid paying excessive amounts of tax. You would need to think about the primary aim of such an event (and how to prove this, should the need arise): if the purpose is to entertain staff, you could claim back the costs (per head) of the staff who attended, as well as associated VAT, but you wouldn’t be able to claim this for any client attendees (so you’d have to be prepared to split the costs of the event and separate these out for tax purposes). If the aim of the event was to entertain clients, however, and certain employees just happened to be present, then no reliefs would be claimable.
Do bear in mind, though, that it may still be worth putting such costs through the company, particularly if you trade as a one-person limited company: this could represent a substantial saving in terms of the income tax that would be incurred if you used personal funds to pay for the event.
With offices in London and Essex, and a team of experienced tax advisers and accountants, IBISS & Co can help ensure that your business expenses are structured in the most efficient and effective way. Please contact us today to arrange your free consultation.