Introduction -business entertainment expenses
As a limited company contractor or small business owner, can you claim the cost of business entertainment as a business expense? This will include entertaining clients and your staff however, what are the rules around contractor limited company entertainment expenses and is client entertainment deductible for tax? In this article we will look at both staff and client entertainment costs, how the UK tax system treats these and if and when is client entertainment tax-deductible?
First, what is client entertainment? It could be the case that there may be times when you are running your own company that you would like to drum up some new business. This could be with former, current, or potential new clients. 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. It may 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 some customer entertainment, this can be an excellent way to generate new work for your company. Therefore, let us investigate the HMRC business entertainment rules and as part of this we will consider is client entertaining tax-deductible.
Business entertaining -what to consider?
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 these are a bit of a grey area. Therefore, we will examine how the rules work when you incur client entertainment costs. As part of this, we will discover the tax relief and the VAT implications here.
Please note that general business meals for you while you work on business have different rules.
There are also separate rules for business gifts. You should consider if you are thinking about making a business gift.
Considerations -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 could be either formal or informal for limited company contractors. They will depend on who you are meeting and the type of occasion. The two types of costs regarding client entertainment that you may incur as a result of your work could include:
- The `business entertaining’ of clients. This type of cost, when you are entertaining clients, could be going out for food and drink. As part of your client entertainment expenses, you may be discussing a specific business project. Alternatively, when you are paying for client entertainment costs it could be for you to form or maintain a business connection. It might also include meeting someone to discuss potential work for which they may be looking to hire you. When you are 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. This cost 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 entertainment -what can you claim?
As a limited company contractor, please note that when you consider whether you can claim entertainment expenses, your business cannot claim tax relief on these. However, they are business costs, and therefore the `benefit’ of these are not subject to Income Tax or National Insurance.
Although costs for entertaining clients are not a Corporation Tax deductible expense, they are an actual business expense. What’s more, it is more tax-efficient for your business 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 will pay for them out of your income, which has already been subject to income tax.
Furthermore, you will need to justify each entertainment cost you claim relates to your business. If the cost is for genuine business-related entertaining, 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.
The business entertainment cost should also not be too extravagant, as this could attract attention from the tax inspector.
Besides entertaining your clients, you can also provide staff entertainment. However, this falls under the Annual Event rules in the next section.
The Annual Event
Please 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 amount must not exceed £150 per head for company officials and employees. You can also allow your employees to bring a guest; however, the limit per person is £150. Over a tax year, the annual event can include several events. Providing that the amounts paid through the tax year do not 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 taxable benefits 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.
Business entertainment and VAT
As part of claiming for your entertaining expenses, can you claim VAT on entertainment expenses? Let us investigate can VAT be claimed on entertainment expenses by UK contractors and what are the rules around this.
Client entertainment VAT
Can you claim VAT on client entertainment? When we look this up, the rule is quite simple. This is, you are not able to reclaim the VAT on entertaining costs in relation to clients and customers.
Staff entertaining VAT
Can you claim VAT on staff entertainment expenses? When you entertain your staff as part of the annual event rules, can you reclaim VAT on staff entertaining? Please note the exception to claiming VAT on client entertaining type costs is you can claim VAT if you entertain staff.
This could occur when you are holding an `annual event’ for you and your employees. 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 yourself, your employees, and perhaps their partners, you can only reclaim the VAT related to your employee’s costs.
There are also further rules that are a little complex -for more information, please read VAT Notice 700/65.
When you consider providing business entertainment, it is worth bearing in mind that such events can be beneficial to generating new business leads. When you are entertaining an existing client or potential new client, this can also help you land likely future work. As mentioned above, client entertainment costs are not directly tax-deductible. However, it is more tax-efficient if your business pays for these costs instead of paying for them out of your already taxed personal income.
As a final thought, please make a note of any future entertainment expenses when you incur these.
Link to Contractor Advice UK group on