Entertaining – Does this reduce my tax bill?
How often do you hear ‘I’ll put it on expenses. Let me take you out to lunch. I’ll get this. I’ll put it through the business’?
It certainly appears a lot on TV and in films, and sounds great, but what is actually allowed in the real world? There is a lot of confusion between subsistence and entertaining and the distinction is important because one is an allowable expense for tax and the other isn’t.
Subsistence is food and drinks when you are travelling for business. What you can claim as subsistence depends on your particular business circumstances. Subsistence is an allowable expense for tax.
Entertaining is providing hospitality and entertaining for customers, potential customers and other people. This is most often food and drink but could include other forms of entertainment such as event tickets as well as accommodation, use of assets such as company yacht, gifts and free samples.
You can include entertaining in your business accounts where it is a legitimate business expense. However, you then have to add back the entertaining expenses in your tax return because it is not an allowable expense for tax.
Only in very limited circumstances is it allowed.
Subsistence vs Entertaining
It should be straightforward but real life is often not that clear cut what is considered subsistence and entertaining.
Here are a couple of examples…
1. You take some clients or suppliers out for lunch near your office
In this case the entire meal is definitely entertaining as there is no allowable travel involved and therefore no potential subsistence element.
2. You are staying away on business and pay for a meal for yourself, a subcontractor who works for you and some clients. –
It all depends on the primary purpose of your trip if you can claim for this as a deduction for tax.
If the main purpose of your trip was for business then you may be able to include the cost of your own meal as a subsistence expense.
Everyone else is classed as entertaining and is not allowable for tax.
If the purpose of your trip was to primarily to meet with the clients or suppliers for a meal, then the whole trip including travel would be counted as entertaining. This is the case even if you were discussing business while you ate.
3. You are a Limited Company director staying away on business with two employees. You pay for the evening meal for all the whole group.
In this case, because everyone was an employee of the company and it was a business trip, providing the circumstances of the trip satisfy all the necessary requirements, the meal is classed as subsistence and is allowable.
Just remember, although a subcontractor may feel like an employee for travel, subsistence and entertaining purposes they are not. They need to be on the payroll to be classed as an employee.
Is staff entertaining tax deductible?
There are still some circumstances where you can reward your staff through the company. You are allowed entertaining of payroll staff as a taxable expense providing it is within certain limits.
The general idea is that you can pay for a few company events each year such as the work Christmas party, summer BBQ, staff outing etc. However, there are conditions to be met otherwise it becomes a taxable benefit to your employees and a penalty rather than a treat.
You can spend up to an average of £150 per person in total on company events throughout the year, including any provided transport, accommodation and VAT.
All the events must be open to all employees of the company to be eligible.
The £150 is a limit, not an allowance. This means that if you exceed £150 per person, the entire spend becomes a taxable benefit for the employees.
You can include yourself only if you are a limited company director, on the payroll and have other non-director staff. Directors with no other employees and sole traders cannot entertain themselves even at Christmas!
Entertaining yourself is not allowed if you are a sole trader because you are not an employee of the business, you are the business.
How about gifts?
Entertaining is not just about food and drink, what about other perks and gifts? The rules are strict about gifts to non-employees such as customers and more generous around gifts to payroll employees.
Gifts to non-employees
You can send Christmas cards as a tax-deductible expense.
You can also send small promotional gifts of up to around £50. However, the gifts must carry a clear advertisement for the business (e.g with branding or logo) which must be on the gift itself, not just the wrapping.
The gifts can’t be alcohol, food, drink, tobacco (unless they are your business) or vouchers.
Non-promotional gifts and larger gifts are classed as entertaining and are not tax deductible as an expense.
Gifts to employees
If you are self-employed, you don’t have to report or pay tax on personal gifts to employees.
For limited companies the rules are different. If you give your employees a gift of less than £50 e.g. a couple of bottles of wine or a box of chocolates to celebrate Christmas or the birth of a child etc, then this will not normally be taxable. It is classed as a “trivial benefit“.
In the past, this £50 limit was part of HMRC’s general guidance on trivial benefits, but it was made official from 6 April 2016 by Trivial Benefits in Kind Exemption as part of the 2016 Finance Act.
If you are out for a meal you can only claim for yourself and any payroll employees providing all the conditions for subsistence are satisfied.
You can’t ever claim for meals, coffee etc provided to non-employees even if you are discussing business
Subcontractors do not count as staff even if you are treating them in the same way
You can provide staff with a Christmas party or other event providing the average per head limit of £150 is not exceeded across the year.
You can give staff a small Christmas present/life event present of value less than £50.
You can send Christmas cards to customers/suppliers and any gifts must be of a value less than £50 and primarily promotional.
Find out more about how to make client entertainment tax deductible. Contact us for all your small business tax returns and self assessment.