Entertaining clients as a contractor or small business owner

Introduction -business entertainment expenses

As a contractor or small business owner, can you claim for the cost of business entertainment as a business expense?

There may be times when you are running your own company that you would like to drum up some new business 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 incur some unplanned entertaining costs on a recent business trip. Therefore, meeting up with current or potential new clients and providing business entertainment can, in itself, be an excellent way to generate new work for your company.

On occasions when you do meet clients or customers, you may or may not know what you can claim from your business and the rule surrounding these are a bit of a grey area. Therefore, we will take a look at how the rules work when you incur entertaining costs, and what the tax relief and VAT implications are here.

Business entertainment -other initial thoughts

Please note, general business meals for you whilst you go about your work and business have different rules.

There are also separate rules for business gifts that you should consider if you are thinking about making a business gift.

Considerations -business entertainment costs  

The types of entertainment expenses

There are two different types of entertaining costs when you meet business contacts. These could be either formal or informal, and they will depend on who you are meeting and the type of occasion. The two types of costs in relation to client entertainment that you may incur as a result of your work, could include:

  • The `business entertainment’ of clients. This type of cost, when you are entertaining clients, could be going out for food and drink to discuss a certain business project. Alternatively, it could be for you to form or maintain a business connection. It might also include you meeting someone to discuss some potential work that they may be looking to hire you for. This could also include meeting overseas customers in some cases. This type of entertaining will be for business purposes.
  • The ‘non-business entertainment’ of clients. This type of 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.

In general   

Please note, when you consider whether you can claim for 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 entertaining costs 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 you paying for them yourself. The reason for this, is because your business 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 own income which has already been subject to income tax.

Furthermore, for each entertainment cost that you claim for, you will need to justify that it relates to your business. Therefore, if you hire a private plane or luxury yacht for the day, this may be hard to justify for drumming up some new business. In contrast, meals and drinks are a much simpler cost to justify.

The entertainment cost should also not be too extravagant or lavish, as this could attract attention from the tax inspector.

Besides entertaining your clients, you can also provide staff entertaining however this falls under the Annual Event rules in the next section.

The Annual Event    

Please note, you can claim for one entertainment type expense each year without the need to consult HMRC guidelines. This one expense is the annual Christmas party, which 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, upon which tax is payable for the employee and NI is payable for the employer.

Can I reclaim the VAT on business entertainment expenses? 

Unfortunately, you are not able to reclaim the VAT on entertaining costs.

The exception to this rule is if 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 you, your employees and perhaps their partners, you are only able to reclaim the VAT incurred that relates to your employee’s costs.

There are further rules to this that are a little complex -for more information, please read VAT Notice 700/65.

Final thoughts

When you consider providing business entertainment, it is worth bearing in mind that such events can be very useful to generate new business leads. When you are entertaining an existing client or potential new client, this can also help you land potential future work. As mentioned above, entertaining costs are not directly tax deductible. However, it is more tax-efficient if your business pays for these costs, as opposed to you paying for them personally out of your already taxed personal income.

As a final thought, please keep a note of any entertainment expenses, when you incur these in the future.

Link to Contractor Advice UK group on LinkedIn   click here

Published On: March 29th, 2021 / Categories: Contractor Tips, Expenses, Expenses Guides /

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