Entertaining people can be a very enjoyable part of being in business - but when can you get tax relief and reclaim VAT on the cost of entertaining? In this guide, we’ll answer a few of the most important questions about reclaiming expenses and VAT on entertaining costs.
Business entertaining costs are those incurred for the purpose of entertaining people who are not employees of your business. This includes clients and customers but can also mean directors, partners and - if you’re a sole trader - you.
What counts as business entertainment?
HMRC defines business entertaining as providing ‘hospitality of any kind’ and gives examples including:
food and drink
theatre and concert tickets
entry to sporting events and facilities
entry to clubs and nightclubs
use of business assets such as yachts and aircraft
when you provide entertainment or hospitality only for the directors or partners of your business
Is business entertaining tax deductible?
No. You can't claim either tax relief or VAT on business entertaining for anyone who is not an employee of your business.
An exception to this rule would be a situation where directors and partners of the business attend an event such as a staff party together with other employees. HMRC may accept this as an employee entertaining expense, but it’s best to check with an accountant if you’re in any doubt.
Employee entertaining costs are those incurred for the purpose of entertaining employees of your business. This is also sometimes referred to as ‘staff entertainment’.
If you're entertaining anyone who is not an employee, this counts as a business entertaining cost rather than employee entertainment. Remember that if you’re a sole trader, you are not an employee of your business.
What counts as employee entertainment?
Employee entertainment costs commonly include - but are not limited to - food, drink, entertainment, venue hire, transport and overnight accommodation. If you’re in any doubt about whether or not something qualifies as an employee entertainment expense, speak to an accountant who will be able to advise you.
Is employee entertaining tax deductible?
Yes. Employee entertaining costs are usually treated as an allowable business expense and are tax deductible. VAT-registered businesses may also recover VAT incurred on allowable employee entertainment.
HMRC only allows you to do this for the cost of entertaining your current employees. An employee has to be someone who is on your business's payroll and is being paid a salary.
Former and previous employees don't qualify, nor do subcontractors and nor do shareholders who don't work in the business.
This can get quite complex if you host an event that’s attended by a mix of employees and non-employees. For example, if you allow your employees to bring a friend to the annual Christmas party (or any other staff parties), you'd have to work out the amount you paid on the cost of entertaining your employees and only claim for that. You can't claim for the cost of entertaining their friends.
Do employees pay tax on entertainment?
Entertaining your employees may be an allowable expense for tax relief in your business’s accounts, but it could also be a benefit on which your employees have to pay some tax and added to the P11D.
If you’re hosting an annual event, such as a Christmas party, that’s open to all staff and costs less than £150 per guest present, then HMRC is not likely to regard it as a taxable benefit for your employees.
But if any of these three conditions aren’t met, then the whole cost of the event becomes a taxable benefit. For example, an event is likely to become a taxable benefit if any of the following is true:
The event is a one-off meal to celebrate a new contract or good work.
Some employees are excluded.
The cost per head is over £150.
What if your business has no employees other than directors or partners?
If your business has one or more directors or partners, but no other employees, then the issue becomes more difficult. HMRC says that the cost of providing entertainment only to directors or partners doesn’t qualify for tax relief or a VAT deduction.
But they also say that if the directors or partners are travelling ‘away from their normal place of work on a business trip’, then any VAT paid on the cost of travel, accommodation and meals can be reclaimed. The rules for tax relief would mirror this. This also applies to employees, sole traders and to subcontractors who are part of the team and treated like employees.
Please do not hesitate to contact me if you have any questions. Contact details are on our website.
Steve Pearce MICB PM.Dip
30th Oct 2023