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Tax relief rules on business and staff entertainment

Tax relief rules on business and staff entertainment

Jonathan Green

Business entertainment

Expenditure on business entertainment is not allowable as a deduction against profits. Nor may a deduction be made for any expenditure which is incidental to business entertainment.

HMRC classes entertainment as “business entertainment” when it is provided free of charge to people who are not employees of your business.
The meaning of ‘incidental’ is not defined by HMRC but should be interpreted to mean any expenditure that is incurred directly or indirectly in connection with the provision of entertainment. 

This might include payments to a third party for the organisation of entertainment or the costs of issuing invitations to customers. It will also include the cost of maintaining assets, such as yachts, which are used for business entertainment purposes. 

Traders may obtain entertainment through barter arrangements in which their own goods or services are exchanged for hospitality. The amount to be disallowed is the larger of:
  • The value at which the transaction is recognised in the profit and loss account, and
  • The cost of the goods or services exchanged for business entertainment.

Businesses who are registered for VAT and not using the VAT Flat Rate Scheme will not be able to reclaim VAT or apply for tax relief on the following types of business entertainment.
  • Food and Drink
  • Accommodation (e.g. hotels)
  • Concert/Theatre/Sports tickets
  • Entry fee for clubs and nightclubs
  • The use of capital assets such as cars, yachts and aircraft
  • When you provide entertainment or hospitality only for the directors or partners of your business

​Staff entertainment

Spending on rewarding staff for good work or to raise morale is classed as employee entertainment which will be eligible for tax relief and you will be able to reclaim VAT on. 

To be eligible to reclaim VAT and for tax relief, the costs must solely be to entertain employees. Former and previous employees don't qualify, nor do subcontractors and nor do shareholders who don't work in the business. An employee has to be someone who is on your business's payroll and being paid a salary so this would also exclude clients or friends of employees. If you want to entertain a mix of employees and non-employees at the same event you can, however you will only be able to claim tax relief on the costs of the employees’ entertainment. 

If the employees are acting as hosts for customers of the business then that will count as business entertainment and will make the costs ineligible for relief or to be reclaimed. 

Entertaining your employees may be an allowable expense for tax relief in your business’s accounts, but it could also be a benefit in kind on which your employees have to pay some tax.

If you’re hosting an annual event, such as a summer boat trip or Christmas party, that’s open to all staff and costs less than £150 per guest present, then this is what HMRC call a “qualifying event” and will not be a taxable benefit for your staff. But if any of these three conditions aren’t met, then the whole cost of the event becomes a taxable benefit - for example if it’s a one-off meal to celebrate a new contract, or if some employees are excluded, or if the cost per head is over £150.

Directors and Partners

Entertainment solely for directors or partners (no employees involved) will not qualify for tax relief or a VAT deduction. However, if a partner or director travels away for a business trip then any VAT paid on accommodation, meals or travel will be eligible to be reclaimed. The rules for travelling away on a business trip apply to anyone who is part of the team and treated as an employee.

If you are planning to hold another virtual Christmas party this year, you can use our blog to find out how to stop he taxman from attending!

Alternatively, if you require advice on claiming tax relief or reclaiming VAT please contact us here