business entertainment

Share This Guide, Choose Your Platform!

Introduction

For limited company contractors and small business owners, grasping the concept of business entertainment and its potential implications is paramount. Business entertaining, such as hosting clients or potential clients, is often intertwined with your contracting work. The key question is, when you do incur such entertaining costs, will you receive a business entertainment tax deduction, and can you claim the cost of entertainment as a business expense? This guide is designed to empower you by shedding light on when staff and client entertainment expenses are tax-deductible. We’ll explore the official rules for entertaining clients and your staff, equipping you with the knowledge to make informed decisions about client entertainment costs and contractor limited company entertainment expenses.

This guide is primarily focused on understanding when entertaining clients and staff are tax-deductible for UK contractors. We’ll explore the nuances of providing entertainment for UK contracting professionals, how the UK tax system treats a contractor’s entertainment expense, and when client entertainment is tax-deductible (UK). Additionally, we’ll delve into the topic of claiming VAT on business entertainment as a UK contractor or small business owner.

Initial thoughts 

First thoughts on business entertainment expenses (UK) 

First, let’s clarify what we mean by business entertainment and contractor entertainment costs. It could be the case that there may be times when you’re running your own company, and you like to drum up some new contracting business. This could be with former, current, or potential new clients, and, as a result, you incur an entertaining expense. Indeed, you may decide to meet up with a client or customer to celebrate and discuss some recent good work and what your plans in the future may be and, again, incur an entertainment cost. Furthermore, it could be that you ended up entertaining clients on a recent business trip, and these were initially unplanned. By understanding these different scenarios, you’ll be better equipped to manage your entertainment costs.

Meeting with current or potential new clients and providing hospitality in the form of customer entertainment can be a powerful tool for generating new work for your company. This guide will help you understand the HMRC business entertainment rules, including whether entertaining clients is tax-deductible. Armed with this knowledge, you can feel inspired to take clients out to grow your business strategically.

Understanding the rules for claiming business entertainment expenses (UK)

You may not know what you can claim from your business when you meet clients or customers as a UK contractor. Indeed, the rules surrounding genuine business expense claims for contractors are a grey area. Therefore, we’ll examine how the rules work when you incur customer entertainment. As part of this, we’ll investigate whether client entertainment is tax-deductible and discover the tax relief for a contractor’s entertaining expense and VAT implications here.

Please note that general business meals have different rules when doing company work.

There are also separate rules for claiming business gifts. Therefore, you should review these if you are considering making a business gift.

Common questions

As a contractor or small company owner, you’ll likely have questions about what you can claim as entertaining costs. Therefore, here are some common questions business owners will probably ask or think about:

  • Can I claim entertainment as a business expense?
  • How much entertainment expenses can I claim?
  • Are client entertainment expenses tax-deductible?
  • How to entertain clients in business?
  • Is the client entertaining tax-deductible?
  • Can I claim entertainment expenses?
  • What entertainment expenses are tax-deductible?
  • Are business meetings tax-deductible (UK)?
  • Can you claim VAT on entertaining?
  • Is business entertainment tax-deductible?
  • Can I claim VAT on client entertainment?
  • Can I claim VAT on staff entertaining?

In this guide, we’ll examine all the above and determine what entertainment is tax-deductible.

Primary considerations concerning business entertainment costs

What types of company entertainment expenses are there?

There are two types of client entertainment costs when you meet business contacts as a UK contractor. These contractor entertaining expenses could be formal or informal for limited company contractors. They’ll depend on who you’re meeting and the type of occasion. The two types of costs regarding customer entertainment you may incur because of your work could include:

  • The business entertainment of clients. This cost could be going out for food and drink when entertaining clients. You may discuss a specific business project as part of such expenses.
  • On the other hand, paying for client entertainment costs could help form or maintain a business connection. The business entertainment expense might include meeting someone to discuss potential work for which they may be looking to hire you. When you’re entertaining clients, this could sometimes include meeting overseas customers. This type of customer entertainment is for business purposes.
  • The ‘non-business entertaining’ of clients. Contractor entertaining costs of this type may occur when you meet a business contact for social reasons. Such a meeting could be a day out at the races or to attend a sports event, or it could be some other social engagement or day out.

What can you claim for business & client entertaining expenses?

As a limited company contractor, the general rule when considering whether you can claim the cost of entertainment is that your business can’t claim tax relief on these. However, entertaining clients is a business cost; therefore, the `benefit’ isn’t subject to Income Tax or National Insurance.

Although entertaining clients and customers isn’t a Corporation Tax deductible expense, a contractor’s entertaining cost is a business expense. However, when considering client entertainment & Corporation Tax, it’s still more tax-efficient for your limited company to pay for these rather than cover the cost yourself. Your company will pay for these out of its pre-tax income. Compare this to when you pay for these on a personal level. When you do this, you’ll pay for them out of your income, which has already been subject to Income Tax. You can’t claim business entertainment costs if you’re a sole trader.

It would be best to justify each contractor entertainment cost you claim relates to your business. If the cost is for genuine company entertainment expenses, it counts as business entertainment. However, if you hire a private plane or luxury yacht for the day, this may be hard to explain when drumming up some new business. In contrast, meals and drinks are much simpler to justify. Therefore, the business entertainment cost should not be too extravagant, as this could attract attention from the tax inspector. Furthermore, any entertainment costs should be reported as expenses on form P11D each year.

Besides entertaining your clients, you can provide staff entertainment. However, this falls under the Annual Event rules (see below).

Business meeting expenses

If you hold a business meeting in your office and provide basic food and refreshments such as sandwiches and soft drinks to enable the meeting to proceed without disturbance, then this cost is tax-deductible. Furthermore, if there’s no alternative to holding a meeting outside the office, only similar basic provisions are allowable for tax. Hospitality of any kind after the meeting, including the provision of alcohol, won’t be tax-deductible as it will not meet HMRC’s strict business purposes test. This includes taking a client or customer to a restaurant after the meeting has been completed.

Other considerations for contractors

What is the Annual Event?

As a UK contractor, you can claim for one annual entertainment expense to reward your staff. This expense will provide employee entertainment, often known as the annual Christmas party. However, the official term for this allowance is now known as the `Annual Event.’

The total cost per head for the Annual Event must not exceed £150 for company officials and employees. The event must be open to all staff, and you can allow your employees to bring a guest. The limit for guests is £150 per person. Over a tax year, the annual event can include several events. Providing the amounts paid through the tax year don’t exceed the limit of £150 per person; these expenses are tax deductible for Corporation Tax purposes.

If you exceed the limit for the Annual Event, the cost is treated as a taxable benefit in kind. The result of this is:

  • Tax is payable to HM Revenue & Customs (HMRC) for the employee; and
  • NI is payable to HMRC for the employer. 

What are trivial benefits?

Another claim to bear in mind is trivial benefits. These are available to directors of `close companies’, and there is a limit of £50 per time to stay within the tax-free amount. As a director, you can claim a trivial benefit up to six times yearly.

Can you claim VAT on entertaining?

Business entertainment & VAT 

We’ll now look at when you can reclaim VAT on entertaining. Indeed, when considering business and entertainment costs and claiming VAT on entertainment, there are two different areas to consider. Providing client and staff entertainment is the two business entertainment areas for contractor company owners. Therefore, can you claim VAT on entertainment expenses (limited company) as part of claiming for your business entertaining expenses? Furthermore, can VAT be claimed on entertaining costs by UK contractors, and what are the rules around this? Let’s now investigate claiming VAT on entertaining and when you’re eligible to do this.

Business entertainment (clients) & VAT

Can you claim VAT on client entertainment? When you’re entertaining clients, this could include:

  • Attending a sports event.
  • A golf day.
  • A meal at a restaurant.
  • Attending a race event.

The rule is quite simple when we consider reclaiming VAT on client entertaining. You can’t reclaim VAT on entertaining costs in relation to clients and customers. Indeed, this covers any expenses regarding entertaining past, present and potential future clients.

However, when business directors attend a staff party or event with other employees, HMRC accepts that VAT can be claimed. In this instance, you can claim VAT related to directors and staff but not for non-employees (see below).

Staff entertaining VAT

Can you claim VAT on staff entertainment expenses, or when is staff entertaining VAT reclaimable? On the other hand, when you entertain employees of your business as part of the annual event rules, can you reclaim VAT on staff entertaining? To clarify, the answer to all these questions is yes. You can claim the VAT incurred on staff entertainment. However, you can’t claim VAT on staff partners, other guests or shareholders who aren’t employees. Please read VAT Notice 700/65 for further guidance on this.

Staff entertainment could occur when you hold an `annual event’ for you and your employees. Indeed, you can reclaim the VAT on this cost if it meets the guidelines for claiming for an `annual event.’ To clarify, if you provide entertainment for directors or partners, your employees, and perhaps their partners, you can only reclaim the VAT related to your employee’s costs.

Therefore, you can’t claim VAT on client entertaining costs. However, you can claim VAT if you entertain staff and meet HMRC’s guidelines.

Final thoughts 

When you consider providing business entertainment, it’s worth bearing in mind that such events can be beneficial to generating new business leads. Moreover, entertaining an existing or potential new client can help you land likely future UK contracting work. As mentioned above, client entertainment costs aren’t directly tax-deductible. However, it’s more tax-efficient when claiming entertainment expenses if your business pays for your contractor’s entertainment costs instead of paying for them out of your already taxed personal income.

As a final thought, please make a note of any future contractor entertainment expenses when you incur these.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Contractor Tips, Expenses, Expenses Guides /

Share This Guide, Choose Your Platform!

Leave A Comment