[28.11.23]

Christmas is often seen as a great time to entertain clients and staff, to thank them and to encourage them to continue working with or for you.  As we sprint towards Christmas, we thought now may be a good time to remind clients of the tax rules and implications around entertaining clients and staff.

What is an entertainment expense?

HMRC states that entertainment can involve eating, drinking and other hospitality such as accommodation or tickets to an event. Types of entertainment include:

• ‘business entertainment’ of clients – eg discussing a particular business project or forming or maintaining a business connection
• ‘non-business entertainment’ of clients – eg entertaining a business acquaintance for social reasons

What to report and what to pay depends on the type of entertainment, who arranges it and who attends. Staff entertainment also has its own rules that need to be considered.

Client entertainment

Client or business entertaining covers expense incurred when hosting existing clients, potential clients or anyone else who is not an employee. In most cases, the cost of entertaining is not tax-deductible, nor is VAT on expenditure recoverable.

However, when taking clients out, always pay through the business rather than through personal accounts.  Whilst the expense is not an allowable deduction for Corporation Tax purposes, you will save the income tax you would otherwise pay on withdrawing funds to pay the costs personally.

Staff entertainment

HMRC stipulates that a member of staff is someone on your payroll who is paid a salary.  This means you cannot claim tax relief for previous employees, interviewees, subcontractors or shareholders who do not work in the business. In addition, sole traders or partners in an LLP or partnership do not count as an employee as there’s no legal difference between them and the business.

Staff entertaining is an allowable business expense and is therefore tax deductible. Allowable costs include food, drink, entertainment, venue hire, transport and overnight accommodation. VAT-registered businesses can also recover VAT incurred on allowable staff entertaining expenditure.

While there is no limit to the amount businesses can claim, there are a few restrictions. For example, if people within a business have close relationships such as relatives and dine together this becomes a grey area. There must be a clear business reason for the expense, and expenses must be kept ‘within reason’.

In principle, an employee is liable for Income Tax on the value of any benefit provided by their employment, including the cost of any staff entertaining. To avoid this the employer could opt to make a voluntary disclosure to HMRC or a more popular option is to keep within the boundaries of the Annual Party Exemption.

The Annual Party Exemption

Expenditure of up to £150 per head (including VAT) on an annual staff function, such as a Christmas party or a summer gathering, can be exempt from both Income Tax charges and employer’s National Insurance. It does not have to be a single function, several events can be covered by the exemption, so long as the total cost per head does not exceed £150 per tax year.

To benefit from this, the event(s) must be open to all employees. It should be noted that if the total cost exceeds £150 per head, none of the expenditure can be covered by the exemption. However, where there are several events in the year, the exemption can be used on any combination of these so long as the total aggregate cost adds up to no more than £150 per head.

Director-only entertainment

Where the company has only directors or a sole director and no employees, it is still possible to hold an annual or Christmas event and as long as the normal rules are followed ie. a maximum of £150 per head including VAT. The directors can invite a plus one, either a spouse or family member to the event.  Unfortunately the input VAT cannot be claimed on a director only event as there is no business purpose.

If you have any queries on what is and what isn’t allowable, please speak to Jackie or Andrew.

Castletons Accountants