Financial pointer: How are entertainment expenses treated for tax purposes?
‘Tis the season when companies in the mobility and assistive tech sector head out to celebrate the festive period and all the hard work that has taken place over the year. It also presents an opportunity for some companies to thank their clients for their business throughout the period and strengthen their relationships for the year ahead, with suppliers and distributors inviting their customers to share in the success.
For those who look after the financials however, understanding which expenses are tax deductible can be a confusing quandary.
Aiming to clear up the tax rules relating to entertainment expenses, James Foster, Technical Commercial Manager at SJD Accountancy, the UK’s largest contractor accountants, discusses the ins and outs of this unique and complex area of expenses.
By James Foster, Technical Commerical Manager
Regardless of which sector you operate in, entertaining for business purposes is a common occurrence for most companies. However, many firms do not realise that the cost of entertaining clients doesn’t benefit from corporation tax relief and you are unable to recover VAT.
The rules around entertaining are complex, so it is essential that you are aware of the tax implications and reliefs available, prior to incurring any expense. This helps to ensure there are no unwanted surprises at the end of the tax year.
In their simplest form, entertainment expenses are best segmented into two categories:
- Client entertainment –such as meeting prospects with a view to generating future revenue or entertaining existing clients to maintain a business relationship.
- Staff entertainment – such as an annual Christmas party or a summer barbeque.
Initially, you must define the ‘type’ of entertainment and this will then help you to understand what is deductable against company profit. The ‘type’ impacts a variety of factors, including whether corporation tax relief is available, the ability to reclaim VAT (assuming you are VAT registered on the standard VAT scheme), P11d liability and whether there are personal tax implications for the recipient. The importance of keeping comprehensive records is essential to ensure that you are able to benefit from any tax relief.
Entertainment expenses can be difficult to navigate for any company, no matter the size. Below is a brief overview of the rules, which will help companies to work in the most tax-efficient way possible:
- You can only claim subsistence for yourself or payroll employees and this is dependent on all the conditions being met. You will be able to claim corporation tax relief on this, as well as VAT, if eligible to do so.
- While staff entertainment is deductible against corporation tax and VAT can be reclaimed, there may be a P11D liability and personal tax to consider.
- When entertaining clients, keep in mind that this expenditure will not benefit from corporation tax relief, so make sure all costs are reasonable.
- Providing the annual per head limit of £150 is not exceeded, you can provide staff with a Christmas party or other events throughout the year, that would not attract any additional personal tax for employees.
As mentioned, client entertainment is not tax deductible and it is not possible to reclaim VAT on this expenditure. It is still allowed to be an expense for the business and not a personal income, but essentially, companies must operate a reasonable and sensible approach to entertaining their clients.
Staff entertainment will always qualify for corporation tax relief, as long as it is exclusively for the purposes of trade and is not incidental to client entertainment.
It’s essential to know the difference between client and staff entertainment. HMRC suggests asking yourself if, in the absence of clients/customers, the expenditure would still be incurred? If so, this would be regarded as staff entertainment.
If you are VAT registered on the standard scheme, you are also able to reclaim the VAT on staff entertainment expenses, in addition to the corporation tax relief.
However, as with any other employment benefit, there will be tax implications for both the business and the individual. The cost of the benefit will need to be included on a P11d, with class 1A National Insurance paid on the cash value of the benefit at 13.8% by the business. The individual that receives the benefit will also pay personal tax on the cash value of the benefit. A lot of larger employers choose to include these expenses in a PAYE Settlement Agreement (PSA) so that they can pay the associated personal taxes on behalf of their employees.
Businesses choosing to entertain directors or partners do not benefit from input tax recovery under ‘staff entertaining’. HMRC take the view that these individuals do not need to be rewarded or motivated with entertainment. However, HMRC do concede that when these individuals attend a staff party, input tax can be recovered in full.
In light of the upcoming festive period, the perfect example of how the staff entertainment benefit can be utilised is for an annual Christmas party.
If the below criteria are met, expenditure on annual events will qualify for corporation tax relief and VAT reclaim. However, this will not be regarded as a taxable benefit meaning there is no P11d liability or personal tax to pay.
- The cost must not exceed £150 per attendee (including VAT). If there are multiple annual events, where the aggregate cost is £150 per attendee or less, the total will still qualify. It is important to note that this is not an allowance, it is a limit. If the cost of providing the event exceeds £150 per head, the full amount will be a taxable benefit.
- The event must be open to all employees. It can be restricted to all employees in a specific location; however, it cannot be restricted to a certain job role, such as just management.
- The cost can include food, drink, tickets to events, accommodation and a taxi fare home.