Conducting hospitality activities can be a great advantage of doing business, but understanding the intricacies of tax relief and VAT reclaim on these expenses can often be complicated. This guide is designed to elucidate and answer key questions concerning the retrieval of VAT and expenses incurred on entertainment costs.
Note: The guidance offered within this article concerning VAT reclaims primarily applies to VAT-registered businesses not employing the VAT Flat Rate Scheme.
The Scope of Business Entertainment
Business entertainment expenses largely refer to expenses you incur when entertaining individuals who aren’t your business’s employees. This extends to clients, consumers, directors, partners, and even yourself if you’re a sole proprietor.
What Constitutes Business Entertainment?
HMRC defines business entertainment as providing ‘hospitality of any kind’. A few concrete examples of this include:
- Food and beverages
- Lodging
- Theatre and concert passes
- Access to sporting events and facilities
- Admission to clubs and nightclubs
- Usage of corporate assets like yachts and aeroplanes
- Specific instances, such as when you provide entertainment or hospitality solely for your business’ directors or partners
Is Business Entertainment Tax Deductible?
The answer is, unfortunately, no. Tax relief or VAT reclaims cannot be made on business entertainment for anyone who is not an employee of your business. However, an exception might be made when directors and partners of the business attend a staff event along with other employees. In such cases, HMRC might categorise this as employee entertainment expense. But when in doubt, consulting with an accountant is always a wise choice.
The Intricacies of Employee Entertainment
Employee entertainment costs, also referenced as ‘staff entertainment’, are expenses incurred while entertaining your business’s employees.
What Encompasses Employee Entertainment?
Typically, employee entertainment costs include but aren’t limited to:
| Costs | Description |
|---|---|
| Food and Drink | Catering expenses during the entertainment |
| Entertainment | Costs for organising games, hiring performers, etc. |
| Venue Hire | Rent paid for the location of the event |
| Transport | Travel costs for the employees to and from the event |
| Overnight Accommodation | Cost of lodging if employees are staying overnight |
If you’re unsure whether an expense qualifies as employee entertainment, it would be best to consult an accountant.
Is Employee Entertainment Tax Deductible?
Yes, employee entertainment costs are generally treated as an allowable business expense and are tax-deductible. For businesses registered for VAT, VAT incurred on permissible employee entertainment can also be recuperated. However, this only applies to the cost of entertaining current employees on your business’s payroll who receive a salary.
Tax Implications for Employee Entertainment
While entertaining employees may be an allowable expense for tax relief in your business’s accounts, it might also be a benefit liable to taxation from your employees’ perspective.
If you organise an event such as the annual Christmas party costing less than £150 per attendee and open to all staff, HMRC is less likely to consider it a taxable benefit for your employees. However, if any of these criteria aren’t met, the entire cost of the event becomes a taxable benefit. You can read up more on Christmas party allowances here.
Taxable Benefits: Examples
An event may become a taxable benefit under the following conditions:
- The event is a singular occasion, such as a meal to celebrate a new contract or commendable work.
- Some employees are excluded from the event.
- The cost per person exceeds £150.
Entertainment in Businesses with Directors Only
If your business comprises solely of directors or partners without any other employees, matters become more complex. HMRC rules state that costs of entertainment provided only to directors or partners aren’t eligible for tax relief or VAT deduction.
However, if these directors or partners are travelling ‘away from their usual workplace on a business trip’, VAT paid on the cost of travel, accommodation, and meals can be reclaimed. Tax relief rules would mirror this exception.
A Deep Dive into Mixed Attendance Events
When hosting events involving a mix of employees and non-employees, such as if your employees are allowed to bring guests to the annual Christmas party (or other staff events), the situation can get quite complex. In these instances, you are required to calculate the amount spent entertaining your employees and claim only that expense. The cost of entertaining their friends is not something you can claim.
Calculating Mixed Attendance Expenses: An Example
Assume you’re hosting a Christmas party where the total cost is £1000. You have 20 employees and among them, they bring along 5 friends. The cost per head would be £1000/25 = £40.
In this case, you’d only be able to claim for the cost of entertaining employees: £40 x 20 (employees) = £800.
The remaining £200 spent on friends (5 friends x £40) would not be an allowable expense for tax relief or VAT reclaim.
Managing Non-Traditional Employee Scenarios
If your business is a sole proprietorship or employs subcontractors who are treated like team members, the rules might differ. In this case, costs of entertainment provided during a business trip can be claimed. Here, a business trip refers to travelling ‘away from their normal place of work’ and HMRC allows VAT reclaims on costs of travel, accommodation, and meals incurred during such trips. Tax relief rules align with this provision.
Non-Traditional Employee Scenarios: An Example
Suppose you are a sole trader and you decide to take a business trip to a trade fair aiming to network with potential clients. During this trip, you take these prospective clients out to dinner. The costs of your travel, accommodation, and meals can be claimed under the provision that you are away from your usual workplace on a ‘business trip’.
Conclusion
While the topic of business and employee entertainment expenses may seem overwhelming due to its numerous specifics and exceptions, the aim of this guide is to simplify these complexities. However, it’s always advisable to seek advice from an accountant or a financial advisor when in doubt. They can provide the necessary expertise and guidance tailored to the specific situation and needs of your business, ensuring that you make the most of the tax allowances available to you.
Remember, with the right professional guidance, navigating the fiscal landscape can be much easier than it initially appears. At Devonshire Green Accountants, we’re here to help – contact us today for a free consultation!
