Any cost relating to entertaining of existing, potential customers and contacts is not treated as a cost for Corporation Tax purposes. It is still a valid business expense that will be shown in the company’s Profit and Loss Account within its annual Financial Statements. However, the company is not able to claim entertaining as a Corporation Tax deductible cost.
Business entertainment is defined as any form of free or subsidised entertainment or hospitality to existing, potential customers and contacts.
Entertainment includes hospitality of any kind and includes:
provision of food and drink
provision of accommodation (such as in hotels)
provision of theatre and concert tickets
entry to sporting events and facilities
entry to clubs and nightclubs
If you are also present, as a director / employee, then your own costs of food and drink etc would also be included as part of the cost of business entertaining.
It is possible that the cost of your accommodation and travel could also be included in the definition of business entertaining. However, I would not classify the cost of your general accommodation and flights as business entertaining unless there is a direct link between the customer's entertaining and the flight and accommodation.
So for example, if you were to arrange a business entertaining function and you were travelling on a flight and booking accommodation where the sole purpose of attending the event was business entertaining then the cost of the flight and accommodation would be included as business entertaining. However, you travel around Europe to meet potential customers etc and to ‘drum up’ business. This is not entertaining. It is only when you provide hospitality to them and pay for free or subsidized food and drink etc that it becomes business entertaining.
More information on business entertainment can be found in the HMRC Business Income Manual
Staff entertaining
There is no limit to the amount that a business can spend and claim as a Corporation Tax deductible claim in respect of staff entertainment providing there is no ulterior motive behind the expenditure.
Any staff entertainment undertaken to boost staff morale is an allowable business and tax cost as it incurred for the benefit of the business.
The cost of an annual staff function is an allowable business cost. The allowable costs would include food, drink, event entertainment and any other incidental costs, such as room hire, travel and overnight accommodation.
Staff benefit in kind
Just because the cost of staff entertainment is a tax allowable business cost does not mean that it is also tax-free when provided to the staff.
H M Revenue & Customs may seek to tax the staff entertainment as a benefit in kind. Benefits in kind are normally included on an annual form P11D. H M Revenue & Customs will then request income tax once a year on the cost of the annual entertaining benefit provided to the business’ staff.
The business would also be required to pay 13.8% Class 1A National Insurance by 19 July following the end of the income tax year on 5 April. There is no National Insurance cost to staff. In other words, staff are not required to pay employee’s National Insurance at 12%.
There are a number of exemptions that allow a business to provide staff entertainment without it creating a taxable benefit in kind. This includes the £150 ‘Annual Party Exemption’ and also the £50 ‘Trivial Benefits Exemption’
VAT recoverability
A VAT registered business is not able to reclaim input VAT on the cost of entertaining UK customers.
VAT registered businesses can recover VAT incurred on the allowable costs of staff entertaining. However, a business cannot recover VAT incurred on entertaining customers, or suppliers and similar business contacts.