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Entertaining Claims

Employers who cover the costs of their employees providing entertainment for clients have certain tax, National Insurance and reporting obligations.

Here are some of the things you need to know:

Tax Deduction in Business Accounts

Entertaining expenditure is disallowed as a deduction for tax purposes.

However, staff entertaining which is not treated as ‘entertaining’ for tax purposes will be an allowable expense.

The general rule for employee expenses is that they are allowable for tax as long as they are wholly and exclusively incurred of the purposes of trade.

Employee Expenses

An employer may reimburse an employee for an expense tax-free if it is incurred wholly, necessarily and exclusively in performance of their employment.
If employees incur a cost on behalf of the company, tax & NIC relief is available when they reclaim the costs from the employer.

Entertaining Expenses

When an employer reimburses entertaining expenses incurred by an employee for:
  • Business purposes – HMRC will accept that there is no taxable benefit for the employee.
  • Non-business purposes – There will be a taxable benefit but the cost should be reported on form P11D. As ‘entertaining’, there would be no deduction in the employers’ accounts. However, as a staff benefit, the employer should be entitled to a tax deduction.

 

Pitfalls and Planning Points

Expense claims by employees should provide enough detail to support the level of entertaining expenditure. HMRC may challenge any reimbursement made by the company if the expense is not for the purpose of the business, and will therefore lead to double taxation.

Room Hire at Events

If a room is hired for an event at which selling and other business takes place and is followed by entertaining, it is possible to claim the cost of the room hire as advertising and marketing on the basis that it was used for business activities

  VAT

  • Input VAT is recoverable on the cost of an annual staff party or function as long as all the directors and employees are invited.
  • Input VAT is not recoverable on the cost of entertaining UK clients.
  • If an event serves to entertain clients and staff, you have to disallow a proportion of input VAT based on the ratio of clients to staff.
  • If an event is held to entertain customers, and staff are there to look after the customers, the whole event is regarded as ‘entertaining’ so input tax cannot be recovered.
  • If the event is mainly for marketing, the portion of cost incurred for entertainment should be disallowed.

 

  Overseas customers and VAT

  • A VAT registered business may reclaim input VAT on the cost of entertaining an overseas customer as long as it is on a reasonable scale.
  • HMRC will not allow the claim if the entertaining is part of a corporate event. This includes golf day, day at the races and trip to some other type of event.