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Many business owners keep receipts from their lunches and coffee meet ups because they can claim them back as expenses. But even where the expenditure is made from business profits, is it tax deductible? It’s important to understand what is allowed for tax purposes and what isn’t, because HMRC has started to take a greater interest in the way businesses are handling their entertaining expenses.
With certain exceptions, expenditure on business entertainment or gifts is not allowable as a deduction against business profits, even if it is a genuine expense of the trade or business.
HMRC’s definition of business entertainment is that it is free or subsidised hospitality or entertainment and the person being entertained may be a customer, a potential customer, or another person.
Expenditure on business entertainment is not allowable as a deduction against profits for tax purposes, and travelling costs incurred in connection with business entertaining are also not an allowable expense.
Entertaining staff
Whilst the entertainment of customers, or other persons unconnected with the business, is not tax deductible against business profits, the entertainment of staff is deductible against profits.
This is because there are different tax rules in relation to the entertainment of staff, which this article will go on to explore.
Summary of tax deductibility against business profits
- Where the entertainment expense relates to customers, potential customers, or suppliers etc, it is not tax deductible against business profits;
- Where the expense relates to the entertainment of staff, it can be deducted against business profits with tax relief being obtained.
Tax liabilities in relation to staff entertaining
Social events for employees are treated as taxable benefits in the hands of those employees. The tax is collected in one of two ways:
- With the benefit being included on form P11D for each employee. This means the employee pays tax on the benefit at their marginal rate, with the employer paying the Class 1A national insurance contributions; or
- With the employer entering into a PAYE settlement agreement (PSA) and paying the tax and the NICs on the cost of the benefit. In this case, the cost of the benefit is grossed up at each employee’s marginal rate of tax, with the employer‘s liability being based on the grossed up amount. Many employers prefer to enter into a PSA rather than expect their employees to pay tax on the benefit of being entertained.
When is staff entertaining NOT taxable?
A staff annual event may qualify as a tax-free benefit, provided it satisfies the following conditions:
- Every employee is invited. To be tax exempt the event cannot be for a select group of employees only. If the business hosts different events for different departments these could be allowable, if invitations were extended to all the employees of each department – they wouldn’t necessarily need to accept!
- The event needs to be an annual event, such as an annual Christmas party, or annual summer barbeque.
- The cost for each attendee must not exceed £150 per person (including VAT and any additional costs e.g. travel and accommodation) met by the employer.
If the cost of a staff event exceeds £150 per attendee, the entire cost of the event will be taxable as a benefit in kind. The exemption can however be used to cover the cost of more than one annual event, provided that the £150 limit per attendee is not exceeded in a tax year.
In addition to the above, businesses can spend up to £150 on entertaining, per employee per year, without incurring a tax charge. Again, this is an exemption, not an allowance, and if the cost per head exceeds this amount, the entire expense becomes taxable.
Events for staff and clients together
Where an event is attended by clients and employees, careful record keeping is needed. It will be necessary to consider why employees are attending, for instance, are they needed to look after the client as their account manager or simply going along for their own entertainment? Depending on the circumstances, the costs may need to be divided between business entertaining and staff entertaining elements.
Concerts or sporting events
This kind of entertaining is closely examined by HMRC and for there to be no tax charge, the entertainment must be business-related and the employee’s attendance must be necessary. This means the core purpose of the event must be to discuss business or an ongoing project, or to further business relationships.
If your business holds events that could be classed as a benefit in kind for employees, or if you want to claim your events are tax deductible, you must maintain excellent records. Be aware that records for all activities to be classed as a benefit in kind must be retained for a minimum of three years and should be produced as requested by HMRC.
