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Navigating Business Entertainment Expenses: What Can You Actually Deduct?



What is business entertaining?


This is typically the provision of free or subsidised hospitality or entertainment.


Generally, business entertainment is not an allowable business expense, but there are exceptions to the rule.


What is allowable?


Meeting Lunches

As long as it isn’t excessive, the provision of light food and drink during a business meeting at the business premises is not considered entertainment.


Trade that includes the provision of hospitality for payment

Where the beneficiary gives something of equivalent value in return for the entertainment provided, the entertainment expense is allowable. 


Entertainment supplied under a contractual obligation is not disallowed

Additionally, goods and services sold in the normal course of trade are not business entertainment and so the costs are an allowable deduction against trading profits.


The cost of goods or services given away as advertising promotion

The cost to a business of giving away its own goods or services for the purpose of advertising those goods or services to the public is not business entertainment expenditure.


The legislation says that expenditure will not be classed as business entertaining expenditure if the entertainment:

(a) is of a kind which it is the trader’s trade/company’s business to provide, and

(b) is provided in the ordinary course of the trade either for payment or free of charge in order to advertise to the public generally.


Training for employees and franchisees

The cost of food and accommodation provided for employees and franchisees attending training courses for the purpose of the trade is not disallowable under the legislation. However, if food and accommodation are provided as part of training given to any other person free of charge, then the cost is entertainment and is disallowable.


Publicity costs

Promotional events arranged for the purpose of publicising a trader’s products are not in themselves business entertainment but the cost of any food, drink or other hospitality provided as part of the event is disallowable under the legislation. It is often the case that publicity for the trader’s products is just one part of an event designed to provide hospitality for customers, journalists, and so on. In this event, the expenditure, except the direct cost of publicising the products, is disallowable under the legislation.


Sporting or cultural events

The costs of sponsoring sporting, cultural or other events for the purpose of business promotion/publicity are not disallowable under the legislation. However, it is common for sponsors of such events to be entitled to a certain number of free tickets, private boxes or other benefits as part of the sponsorship package.

The cost of sponsorship is not allowable in full if the sponsor receives tickets or other benefits. You should normally accept a disallowance equal to the value of the tickets or other benefits received.


What if the expense is a mix of entertainment and non-entertainment?


Only the element attributable is not recoverable. The element associated with the non-entertainment expense is allowable.


Can I provide entertainment to my employees?


Allowable, if not ‘incidental’ to entertainment of others

Entertainment of staff incidental to entertaining customers is not allowable for the purposes of direct tax. For example, where the employee takes the customer out to lunch at a restaurant, the whole cost of the lunch for both the employee and the customer is business entertainment and is not allowable. This is because the company would not have paid for the lunch if the guest had not been present and so the employee’s lunch is incidental to that of the customer.


Staff entertaining is allowable


Staff entertaining is allowable, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers (see BIM45034).


Where an employer provides a staff Christmas party, or a sporting event which is open only to employees, the expenditure is not disallowed by the legislation. However, it is still necessary to establish that the expenditure is wholly and exclusively for the purpose of the business. The definition of ‘employees’ is extended to include retired members of staff and the partners of existing and past employees.


Although the expenditure is allowable, the employees themselves may have to pay tax on the entertainment received and the employer will have to report this on form P11D. Further information about the employment income charge to the employee can be found in EIM21670 (meals) and EIM21690 (annual parties and other social functions). However, due to the difficulty in assigning the benefit accurately to the employees, many employers choose to include such items in a PAYE Settlement Agreement (PSA) and pay Income Tax and National Insurance contributions on behalf of the employees (see PSA1050).



 

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