As a limited company contractor or small business owner, what is business entertainment and when might you incur this? When we look at what is business entertaining, this could be entertaining clients or potential clients who are connected to your contracting work. Therefore, when you incur such entertaining expenses, will you receive a business entertainment tax deduction and can you claim the cost of client entertaining as a company expense? In this guide, we’ll consider when are staff and client entertainment expenses tax-deductible. What’s more. we’ll also look into the official rules on both entertaining clients and entertaining your staff. Therefore, let’s consider what to think about with regard to client entertainment costs and contractor limited company entertainment expenses.
As a UK contractor, when is client entertainment deductible for tax? In this guide, we’ll look at both staff and client entertainment costs for UK contracting professionals. What’s more, we’ll consider how the UK tax system treats a contractor entertainment expense and when is client entertainment tax-deductible (UK). Furthermore, we’ll consider when you can claim VAT on business entertainment as a UK contractor or small business owner.
What to consider first around business entertainment expenses (UK)
First, what is client entertainment and what is a contractor entertainment cost? It could be the case that there may be times when you’re running your own company you’d like to drum up some new contracting business. Basically, this could be with former, current, or potential new clients and, as a result, you incur a client entertaining expense. Indeed, you may also decide to meet up with a client or customer to celebrate and discuss some recent good work and what your plans for the future may be and again, incur an entertainment cost. Furthermore, it could also be the case that you ended up entertaining clients on a recent business trip and these were originally unplanned.
If you meet up with current or potential new clients and provide hospitality of any kind in the form of customer entertainment, this can be an excellent way to generate new work for your company. Therefore, let’s investigate the HMRC business entertainment rules and as part of this we’ll consider is client entertaining tax-deductible.
What else should you consider when you claim business entertaining
When you meet clients or customers as a UK contractor, you may not know what you can claim from your business. Indeed, the rules surrounding when these are genuine business expense claims for contractors these are a bit of a grey area. Therefore, we’ll examine how the rules work when you incur customer entertainment. As part of this, we’ll look into is client entertainment tax-deductible and discover what’s the tax relief for a contractor entertaining expense and the VAT implications here.
Please take note that general business meals for you while you work on business have different rules.
There are also separate rules when you claim for business gifts. Therefore, you should consider these if you’re thinking about making a business gift.
As a contractor or small company owner, you’ll likely have some questions around what you can claim as entertaining costs. Therefore, here are some common questions that business owners will likely 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 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 take a look at all of the above and determine what entertainment is tax-deductible.
The main considerations in respect of business entertainment costs
The types of company entertainment expenses
There are two different types of client entertainment costs when you meet business contacts as a UK contractor. These types of contractor entertaining expenses could be either formal or informal for limited company contractors. They’ll depend on who you are meeting and the type of occasion. The two types of costs regarding customer entertainment that you may incur as a result of your work could include:
- The business entertainment of clients. This type of cost, when you’re entertaining clients, could be going out for food and drink. As part of your client entertainment expenses (UK), you may be discussing a specific business project. On the other hand, when you’re paying for client entertainment costs it could be for you to form or maintain a business connection. The business entertainment expense might also include meeting someone to discuss potential work for which they may be looking to hire you. When you’re entertaining clients, this could also include meeting overseas customers in some cases. This type of customer entertainment will be for business purposes.
- The ‘non-business entertaining’ of clients. These types of contractor entertaining costs 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. It could also be some other social engagement or day out.
Business and client entertaining -what can you claim?
As a limited company contractor, when we consider whether you can claim cost of entertainment, the general rule is your business can’t claim tax relief on these. However, client entertainment (HMRC) are business costs, and therefore the `benefit’ of these aren’t subject to Income Tax or National Insurance.
Although costs for entertaining clients and entertaining customers aren’t a Corporation Tax deductible expense, a contractor entertaining cost is an actual business expense. However, when we consider client entertainment & Corporation Tax, it’s still more tax-efficient for your limited company to pay for these, rather than paying for them yourself. This is because 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. If you’re a sole trader as opposed to a company owner, you cannot claim for business entertaining costs.
You will need 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 for drumming up some new business. In contrast, meals and drinks are a much simpler cost to justify. Therefore, the business entertainment cost should also not be too extravagant, as this could attract attention from the tax inspector. Furthermore, any entertaining costs should be reported as expenses on form P11D each year.
Besides entertaining your clients, you can also 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 will be tax-deductible. Furthermore, if there’s no other alternative to hold a meeting other than 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 completed.
The Annual Event
Please take note that as a UK contractor you can claim for one annual entertainment expense to reward your staff. This expense will provide employee entertainment and is 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 also allow your employees to bring a guest. The limit for guests is also £150 per person. Over a tax year, the annual event can include several events. Providing that 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 will be treated as a taxable benefit in kind. The result of this will be:
- Tax is payable to HM Revenue & Customs (HMRC) for the employee; and
- NI is payable to HMRC for the employer.
Another claim to bear in mind is trivial benefits. These are available to director 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 for a trivial benefit up to six times a year.
Can you claim VAT on entertaining?
Business entertainment and VAT
We’ll now look at when you can reclaim VAT on entertaining. Indeed, when we consider business and entertainment costs, and claiming VAT on entertainment, there’s two different areas to consider. Basically, these two areas of entertainment in business are client entertaining for business owners and staff entertaining. Therefore, as part of claiming for your business entertaining expenses, can you claim VAT on entertainment expenses (limited company)? Furthermore, can VAT be claimed on entertainment expenses by UK contractors and what’s the rules around this? Let’s now investigate claiming VAT on entertaining and when you’re eligible to do this.
Client entertainment VAT
Can you claim VAT on client entertainment? When you’re entertaining clients, this could include:
- Attending a sports event.
When we look up reclaiming VAT on client entertaining, the rule is quite simple. This is, you aren’t able to reclaim VAT on entertaining costs in relation to clients and customers. Indeed, this covers any sort of entertainment expense in respect of entertaining past, present and potential future clients.
However, when directors of the business attend a staff party or event together with other employees, HMRC accept that VAT can be claimed. In this instance, you can claim for the VAT that relates to directors and staff, but not for any non-employees (see below).
Staff entertaining VAT
Can you claim VAT on staff entertainment expenses or indeed, 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 you can claim the VAT incurred on staff entertainment. However, you cannot 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’re holding an `annual event’ for you and your employees. Indeed, you can reclaim the VAT on this cost if it fits in with 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, please take note that you cannot claim VAT on client entertaining type costs. However, you can claim VAT if you entertain staff and meet HMRC’s guidelines.
When you consider providing business entertainment, it’s worth bearing in mind that such events can be beneficial to generating new business leads. What’s more, if you entertain an existing client or potential new client, this can also help you land likely future UK contracting work. As mentioned above, client entertainment costs are not directly tax-deductible. However, it’s more tax-efficient when claiming entertainment expenses, if your business pays for your contractor 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