VAT on business entertainment explained9 Oct 2020
Entertaining can be a fun part of a business. You can share experiences, food and drink out of the typical work setting. This can help build relationships among staff and with clients. But before entertaining people through work, it’s important to know what you can claim tax and VAT relief on and how you can be more tax-efficient.
Normally, with any services or goods you buy directly for your business sales, you can reclaim the VAT. However, in most cases, the cost of entertaining is not tax-deductible, and VAT is not recoverable on expenditure. But the rules are complex, and VAT can be reclaimed in certain circumstances.
Here, our team of expert tax accountants explain everything you need to know about VAT on business entertainment. We’ll include a breakdown of the tax treatment of entertaining clients and employees, the rules governing staff parties and taking potential clients out for lunch, and discuss if it’s better to pay for these things through the company or out of your own pocket.
Business entertainment vs employee entertainment
First, it’s important to state that business entertainment is not the same as employee entertainment. According to HMRC, business entertainment is when the following three conditions are met:
Entertainment is provided
It’s provided to a person or people who aren’t employees
The entertainment is provided for free
Entertainment is considered to be any kind of hospitality, and here are a few examples:
Provision of food and drink
Provision of accommodation
Provision of concert or theatre tickets
Entry to sports events and facilities
Entry to clubs and nightclubs
Use of capital asses, like aircraft and yachts for the purpose of entertaining
Disallowable is a state of mind
The effect of something being disallowable is that the cost does not count towards reducing your taxable profits. For an allowable expense you can consider this to be the £ value that you spend, less the corporation tax that expense saves you. For example, rent of £10,000 saves you £1,900 in corporation tax, therefore, the net cost is £8,100. Whereas a client dinner that costs £200, will always cost £200.
So, disallowable expenses of a company are inherently more expensive than allowable ones; however, they aren’t as expensive as paying for something out of your own pocket. Anything you spend from the business bank account has not been subject to income tax, and as long as it doesn’t attract a benefit in kind charge, it will be cheaper than spending personal cash.
When entertaining employees, this might be allowable for tax relief, but it could also end up being considered a benefit your employees will be required to pay some tax on. Before planning employee entertainment, it’s important you’re aware of when you can claim tax relief or reclaim VAT on business entertainment.
Related: Tax Free Benefits for Employees
A limited company can pay for an annual event, and there are no personal tax implications if the total does not exceed £150 per head and is open to all members of staff.
This doesn’t need to be one event either, just “annual”. So, you could have a Christmas Party and a Summer BBQ, and both would be allowable for Corporation Tax purposes provided the total of both doesn’t exceed the £150 per head limit (if it goes even £1 over then the whole amount, it’s a benefit in kind, so tread carefully). The costs can include food, drink, tickets to events, accommodation and a taxi fare home.
If the cost of the event exceeds £150 per head, it’s a one-off meal or if some employees are left out, then HMRC will not consider it a “qualifying event” and the entire cost of the event becomes a taxable benefit.
If you’re registered under the flat rate scheme then obviously you can’t reclaim any VAT on business entertainment, but those who are standard rated can reclaim to the extent the costs are applicable to staff. If you have two staff and two guests, you could therefore reclaim 50% of the VAT on business entertainment. As with everything when it comes to HMRC, a common sense approach is advised.
If you run a limited company and are the sole employee or director, having a Christmas party where you invite 10 guests, who happen to be your family members or friend, may be seen as uncommercial, and therefore has the potential to be disallowed as it’s not for business purposes.
Tip: For an event like a Christmas Party, if you’d like employees and directors to invite spouses, friends or families, in addition to customers and suppliers, you could charge a small amount for guest meals, such as £5 per head. This is not considered a business entertainment situation as the meal isn’t being provided for free. Input tax could then be claimed on the cost of the guests’ meals as long as 83p of output tax is accounted for on every meal sold to a guest.
Rewards & employees acting as hosts
Entertaining employees as a reward or to boost company morale is allowable for tax relief through reclaiming any VAT you pay. On the other hand, if employees are being hosts to a group of clients or customers at an event, there wouldn’t be any tax relief or VAT deduction available. The purpose of the event needs to be to entertain employees in order to be able to claim tax relief or VAT on business entertainment deductions.
Related: VAT in the food industry
Entertainment solely for partners or directors
If entertainment is provided only for partners or directors, the VAT incurred can’t be reclaimed. In this instance, the services or goods aren’t considered to be used for a business purpose. However, when partners and directors attend staff events with employees, you can reclaim the VAT on business entertainment as covered above.
Your company can pay for entertaining clients or potential clients, but this will not be an allowable deduction for Corporation Tax purposes. It’s still worth paying from the company though, as it saves you the income tax you would otherwise pay on withdrawing the funds to pay the costs personally.
It makes no difference if the person being entertained is an existing customer, a potential customer, or any other person who is not an employee. The VAT element of entertaining can only be claimed when it relates to staff, as detailed above.
Which leads to a further word of caution – if a staff member is acting as a host, and the purpose of the cost was to entertain the client, then no VAT on corporate entertainment can be reclaimed at all.
Entertaining overseas customers
VAT can be reclaimed for the cost of entertaining overseas customers if it’s “of a kind and on a scale which is reasonable” in HMRC’s words. An overseas customer is considered to be any customer not usually resident or carrying on business in the UK. Additionally, if you or your employees’ attendance is necessary to entertain overseas customers, you should be able to reclaim the VAT on the incurred costs as well.
Keep in mind that you can only reclaim VAT for costs related to entertaining overseas customers and not overseas suppliers or business contracts. You also can’t reclaim VAT on what HMRC considers “corporate hospitality events”, such as golf days, track days, evening meals or trips to night clubs or sporting events.
Tip: Before planning client and customer entertainment, be aware that you can’t claim it as a tax deduction or reclaim VAT, except on the amount related to entertaining staff and when entertaining customers overseas.
Claiming marketing expenses
When it comes to the grey areas of expense claiming, they don’t come much more clouded than marketing. Let’s take a hypothetical example to illustrate. You run a door fitting company and your business model runs heavily-reliant on being referred clients by contractors.
In your mind, the best marketing strategy for your business is to butter-up these contractors so they recommend your door fitting service to whoever they are building for at that point in time.
What better way to get in the contractor’s good books than by taking them to football matches, fancy steak dinners and buying their wives a few nice handbags, right? Wrong.
Although this is how you “market” your business, your means are completely entertainment-based and ultimately deemed non-allowable by HMRC. Although you’ll most likely have driven business through your strategy, not a single penny of it can be used to claim tax relief. So, what’s the solution? Primarily, as is always the case with HMRC rules, it’s using common sense.
Instead of wining and dining the contractors, organise a marketing event in a venue. Set out a programme, have a presentation, highlight a change in HMRC’s legislation that has forced you to change your entertainment approach, include a keynote speaker, and if you want to treat the attendees, have refreshments and beers etc served at the back of the venue afterwards.
This makes the entertainment one element of your marketing strategy, rather than a sole driver of your strategy’s success. Overall, it gives you the right to claim relief on the event’s expenses.
Corporate boxes are tricky as the treatment of them varies depending on how they are used and who uses them.
As a way to show this, let’s assume a company is buying two corporate package tickets for a prominent London football club at a price of £1,500 + VAT per ticket. What are the VAT, benefit-in-kind and corporation tax implications should the director of the company take with them (i) a client, or (ii) an employee?
(i) VAT in this situation is not recoverable as it falls into the bracket of business entertainment, while corporation tax is not deductible for the same reason.
Where benefit-in-kind is concerned, there are no implications in this case. The director is performing the duties of employment by entertaining a client.
(ii) It can be argued that the VAT is fully recoverable as this serves as a form of employee entertainment, while corporation tax is an allowable expense under the same ruling.
However, there is a taxable benefit in kind for both the employee and the director, assuming the tax is not settled via a PAYE settlement agreement.
Corporation tax, VAT returns and tax efficiency
At Accounts & Legal, we can help small businesses with their needs relating to corporation tax rates and reliefs, in addition to VAT returns and advice on when VAT on business entertainment can be reclaimed. As small business accountants, we can offer advice on business expenses, how much can be claimed and what expenses are allowable and disallowable by HMRC.
This allows us to help small businesses be more tax efficient, saving them time and money. We also have helpful tax advice articles on our website that address accountancy and tax questions our clients have frequently asked.