What is entertainment?
Business entertainment includes hospitality which is provided free of charge to the recipient.
In general, no form of business entertainment is allowable for tax purposes regardless of whether you personally think there is a purpose specifically related to your business UNLESS you are entertaining employees for the purpose of reward and motivation.
In addition, there is no VAT recoverable for entertaining costs UNLESS it is associated with entertaining employees.
Care and Analysis Needed
Where there are events/functions where staff/clients/contacts are present, the costs will need to be apportioned to avoid the entire charge being disallowed for the purposes of tax relief.
Staff entertaining is one of the few exceptions to the rule of being tax deductible provided that it is incurred wholly and exclusively for the purposes of the trade. It must also not be incidental to entertainment provided for customers. The expenditure must be classed as staff welfare and not entertainment.
To strengthen your case, make sure you have a reason for meals off site and keep a record of these meetings e.g who they were with and why they were held. This could be as simple as the directors reviewing and approving the company’s accounts.
Expenditure of up to £150 (gross of VAT) per head per employee (which includes partners and retired employees) will be allowable. Any excess over this and every employee will need to pay tax on the entire cost of the entertainment as a benefit in kind.
Also, for employees earning less than £8,500, where the bill is settled directly by the employer, there is no tax to worry about.
For those above this amount (or directors), there should be a private function room provided in order for it to be tax free and again the bill must be paid by the employer.
Also, do not pay with a personal credit card and then seek reimbursement – this will be seen as a benefit by the Revenue and therefore taxable.
Classic examples of business entertainment are Christmas parties but these should be made available to employees only (and partners/spouses).
Contractors should not attend the company Christmas party as this could give the tax man reason to question their self employed status under IR35.
How this affects tax on your company profits
Generally speaking, client entertaining is not allowable for corporation tax purposes. Entertaining employees is however, provided it is not incidental to the entertainment of others. If you have an event with employees and customers, you will need to separate out the costs.
If employees are away on business, then expenditure on meals and accommodation would be allowable.
Expenditure on a business lunch however, is not allowable as it is deemed to be entertaining.
Again, these are not normally allowable unless it contains an advertisement for the business.
The other exception is where the cumulative value given to any one person is less than £50 in any one accounting period.
Employees can accept gifts of up to £250 per head can be accepted from 3rd parties by reason of their employment without any tax implications.
Generally speaking, it can be argued that this is a form of advertising and therefore a legitimate business expense.
However, in reality, this is hard to prove where there is a dual purpose motive. You will need plenty of factual evidence to defend your treatment as a business expense.