Expenses Month is in full swing here at FreeAgent, and we’re posting lots of useful information about managing and claiming your expenses throughout the whole of May. In the third article of her expenses series, our Chief Accountant Emily talks you through claiming the costs of entertaining for your business.
Entertaining people can be a very enjoyable part of being in business - as sharing time, food and drink away from the office can help to build and cement working relationships. But when can you claim tax relief on the cost of entertaining someone, and what about VAT?
Here are a few important things to bear in mind when it comes to tax and VAT on entertaining costs. Please note, in this article the guidance on when VAT can be reclaimed relates only to businesses that are registered for VAT. If your business is not registered for VAT it cannot reclaim any VAT at all, apart from in certain circumstances when it subsequently registers.
HMRC only allow tax relief and the claiming of VAT on the cost of entertaining your business’s employees. And they’re very strict about who counts as “an employee”. Former and previous employees don’t qualify, nor do subcontractors, nor do shareholders who don’t work in the business. From experience, “an employee” has to be someone who is on your business’s payroll and being paid a salary.
If you’re entertaining anyone else, that counts as “business entertaining” rather than staff entertaining, and you can’t claim either tax relief or VAT on the cost of entertaining them.
For what happens when a business has salaried directors, but no employees, please see section 5 below.
If you’re a sole trader, or a partner in a partnership or LLP, remember that you don’t count as an employee because legally there’s no difference between you and the business, and therefore, you can’t claim tax relief or VAT on the cost of entertaining yourself.
HMRC say that “entertaining” is providing free or subsidised hospitality. Here are examples they give of what can count as “entertaining” - this list is not exhaustive:
We’ll look at the last point in more detail in section 5 below.
When you’re entertaining your employees, this may be allowable for tax relief in your business’s accounts, but it could also be a benefit on which your employees have to pay some tax.
If you’re hosting an annual event, such as a summer boat trip or Christmas party, that’s open to all staff and costs less than £150 per guest present, then this is what HMRC call a “qualifying event” and will not be a taxable benefit for your staff.
But if any of these three conditions aren’t met, then the whole cost of the event becomes a taxable benefit - for example if it’s a one-off meal to celebrate a new contract, or if some employees are excluded, or if the cost per head is over £150.
The cost of entertaining employees as a reward for good work, or to keep up morale, is staff entertaining, which is allowable for tax relief and on which you can reclaim any VAT you pay.
But if your employees are acting as hosts to a group of customers at an event, then that then counts as business entertaining and there’s no tax relief or VAT deduction available on any of the cost of the event.
For tax relief and VAT reclaim to be allowed, the purpose of the event has to be to entertain employees.
If there’s an event with a mixed group and the purpose of the event is to entertain everyone equally, then you can claim back the VAT on the cost of entertaining your employees only. For example, if you have a staff Christmas party and allow your employees to bring a friend, you’d have to work out the amount of VAT you paid on the cost of entertaining your employees and only claim that. You can’t claim the VAT on the cost of entertaining their friends.
If your business has one or more directors, but no other employees, then the issue becomes more difficult.
HMRC say that the cost of providing entertainment only to directors or partners doesn’t qualify for tax relief or a VAT deduction.
But they also say that if the directors or partners are travelling “away from their normal place of work on a business trip”, then any VAT suffered on the cost of travel, accommodation and meals can be reclaimed. The rules for tax relief would mirror this, and this also applies to employees, sole traders, partners, and to subcontractors who are part of the team and treated like employees.
So if you want to have a celebration meal for two directors who are the only employees of the business, make sure that the meal takes place away from the usual place of work and as part of a business trip which the directors would have made anyway, for example to see a client!
This is a grey area so if you are not sure whether you can claim tax relief or reclaim VAT on a particular cost, you should seek professional advice from an accountant who will be able to advise you.
When you’re running your own business, sometimes it’s easy to forget that as well as focusing on paying the bills, you should still think about your own job satisfaction. This week, we’re looking at some essential ingredients for satisfaction:
What makes you feel satisfied with your work? Hit us up on twitter or leave a comment and let us know. And have a great weekend!
It's Expenses Month here at FreeAgent so - in addition to our recent blog posts about travel & accommodation and business use of home expenses - we've decided to make life a little easier for anyone who is unsure about what food and drink they can claim when they're working.
Our Chief Accountant Emily has been hard at work and has created this handy infographic for UK limited companies and sole traders, which explains whether or not they can claim for their lunch when they're out on business. Judging by the questions we've received during our recent live expenses Q&A sessions, it's an issue that many people find confusing - so we hope that this guide will provide a little bit of clarity!
Just copy and paste the code below onto your site:
Lord Young, enterprise adviser to the government, has recently published the second phase of his report into small business. This time he looks at Growing Your Business.
In summary, he’s recommending increased support to help small businesses grow:
I’d like to pick up on three points in the report.
Lord Young points out, “Within the micro business population itself growth has been driven predominantly by businesses without employees.”
Drawing attention to the perceived complexity of the recruitment process - and to the fear many business owners have of recruiting the “wrong” employee, costing them and their business a lot of time and money - he says: “The actual employment process should be simplified. We need to ensure that employers can complete the actions required of them more seamlessly.”
He’s absolutely right. To me, the key to business growth is simplification of the myriad legislative processes involved. Employment, HR, tax, all are hopelessly complicated, and contribute to why many businesses choose to stay small - so making these simpler would be a great boost to the small business sector.
However, I would also hope that these changes are not rushed and that all of the implications are properly considered - to ensure that by simplifying one aspect of running a small business they don’t inadvertently make things more difficult elsewhere!
The report makes a proposal for a £30 million Growth Voucher scheme, but also mentions that the model for this has not been finalised. So it's not yet clear if these vouchers would actually allow small business owners to redeem their value on professional services such as accounting (which is an idea that our good friend Elaine Clark at Cheap Accounting talks about on her blog).
I wholeheartedly agree that small business owners should be encouraged to seek professional help and guidance, given the complexity of the legal framework in which they are operating. A voucher scheme would help with this, however, the quality of the providers would need to be vetted.
I am also concerned that Lord Young wants private firms to set up websites providing “advice and inspiration to help people start and develop their businesses.” My concern here is that this could lead to an enormous and disjointed collection of websites, with business owners confused as to which one to choose. I would have preferred a centrally managed and operated service with funded advice from vetted professionals.
I agree with Lord Young’s recommendation that the Start-Up Loans scheme should be open to anyone of any age who wishes to start a business. Many people over the current age limit of 30 have ambitions to start a business but do not have the money to spare. They may have better-paid jobs than their younger counterparts but are also more likely to have mortgages to pay and children to support, so they cannot simply walk away from a well-paid job
Opening the Start-Up Loans initiative to potential business owners of any age would be a very positive move.
From my perspective, Lord Young’s report has a lot to commend it and I hope that the government will heed his recommendations and act upon them.
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