Entertaining for your business? Make sure you know what expenses you can claim
Entertaining people can be a very enjoyable part of being in business - but when can you claim tax relief on the cost of entertaining, 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 and are not using the VAT Flat Rate Scheme. This is because if your business is not registered for VAT, it cannot reclaim any VAT on purchases, apart from in certain circumstances when it registers later. Similarly, businesses using the VAT Flat Rate Scheme cannot reclaim any VAT on purchases, except for certain capital assets.
Employee entertainment vs. business entertainment
HMRC only allows 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 and nor do shareholders who don't work in the business. 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 entertainment rather than employee entertainment, and you can't claim either tax relief or VAT on the cost of entertaining them.
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.
What is business entertainment?
HMRC classes entertainment as “business entertainment” when it is provided free of charge to people who are not employees of your business. It defines entertainment as “hospitality of any kind” and gives examples including:
- food and drink
- accommodation (e.g. hotels)
- theatre and concert tickets
- entry to sporting events and facilities
- entry to clubs and nightclubs
- use of capital assets such as yachts and aircraft
- when you provide entertainment or hospitality only for the directors or partners of your business
Entertaining employees: taxable benefits
Entertaining your employees may be an allowable expense 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.
Recording the cost of entertaining as an expense in FreeAgent
FreeAgent helps you to prepare accurate accounts by allowing you to select ‘business entertaining’ or ‘staff entertaining’ from a comprehensive list of categories when you’re recording your expenses.
Entertaining employees: tax relief and VAT
The cost of entertaining staff as a reward for good work, or to keep up morale, is classed as employee entertainment, for which you can both claim tax relief and reclaim any VAT you pay.
However, if your employees are acting as hosts to a group of customers at an event, and the purpose of the event is to entertain the customers, then that counts as business entertainment 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.
When your business has no employees other than directors or partners
If your business has one or more directors or partners, but no other employees, then the issue becomes more difficult. HMRC says 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 paid on the cost of travel, accommodation and meals can be reclaimed. The rules for tax relief would mirror this. This also applies to employees, sole traders and to subcontractors who are part of the team and treated like employees.
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.