Disclaimer: This article is for general information and does not constitute personal or business tax advice. Please consult a qualified tax professional for bespoke advice.
Business entertainment is a very common expense for all businesses, large and small, however it’s something that can be difficult to navigate when looking at if you can reclaim the VAT or deduct the expense from your business profits (whether corporation or income tax). The answer to those questions depends a lot on the who, what and where of the entertainment provided.
The legislation we’re concerned with here is Section 1298 of the Corporation Tax Act 2009 for Ltd Companiesand Section 45 of the Income Tax (Trading & Other Income) Act 2005 forSoleTraders & Partnershipsas well as The Value Added Tax (Input Tax) Order 1992 for VAT purposes.
What Is Business Entertainment?
Let’s start by defining some terms.
Business entertainment means the provision of free or subsidised hospitality or entertainment. The person being entertained may be a customer, a potential customer or any other person.
Business entertainment could therefore include:
- Meals and drinks
- Sporting or cultural events
- Hospitality provided at events (like a conference)
- Travel & Accommodation connected to any entertainment
Corporation/Income Tax Treatment
Business entertaining is not deductible: Costs of entertaining customers are not allowable as a business expense when calculating taxable profits. This applies even if the entertainment is directly related to the business or is incurred while winning new business.
This doesn’t mean the entertainment cannot be included in your accounts as it is still a valid business expense, you just do not receive the benefit of a reduction in your corporation/income due to the expense.
This applies to both current and potential customers but also could include individuals in your industry (peers, suppliers and other affiliates). If for example you are an estate agent you could provide business entertainment to subcontractors, mortgage advisors etc and this would qualify as business entertaining (if done for business purposes).
There are a few important exceptions to this general rule, however:
If the entertainment is for employees only, it is deductible – this is then called Staff Entertainment. However see the rules on this, as this kind of entertaining can incur other employment taxes & charges.
If the entertainment is provided in the ordinary course of business, for payment or for free, then it will be allowable, for example a hotel that spends money on entertainment for its guests would be allowable as this is a normal activity of the trade. A pub for example who pays for a musician or comedian to perform, while entertainment of their customers, would be considered a normal activity of the trade and therefore allowable for deduction against Corporation/Income Tax.
VAT Treatment
- VAT on business entertaining for UK customers is not recoverable. You cannot reclaim the VAT on entertainment provided to UK customers.
However, if you’re entertaining for overseas customers, you may reclaim VAT on entertainment costs if:
- The client is from overseas.
- The entertainment is “reasonable” and not overly lavish. What is lavish or not can of course be a matter of opinion – and depend from person-to-person!
- There is a clear business purpose of the entertainment (e.g. it’s for a contract negotiation).
| Who is being entertained? | Corp/Income Tax Deductible? | VAT Recoverable? | |
| Customer (UK) | ❌ No | ❌ No | |
| Customer (Overseas) | ❌ No | ✅ Yes (if conditions met) | |
There are real hidden costs to not correctly classifying business entertainment even if you cannot deduct the expense for corporation/income tax, though!
If you’re a director of a company who takes out customers/potential customers for a meal and you spend £100 – you might (wrongly!) assume since the business cannot deduct the costs for corporation tax, you need to pay this personally – from your already taxed personal money (via dividends/PAYE).
Worse still, the £100 may be recorded by your bookkeeper as a director’s loan if they don’t fully understand the above – resulting in you paying income tax at 33.75% on this come self-assessment time! Not a huge loss at £100, but scale this up to £5000 pounds of mis classified entertainment and this is an additional £1687.50 in income tax you didn’t need to pay.
If you notice you don’t have your business entertaining costs reflected in your accounts, review your profit and loss as it may be worth asking why – or contacting us here at Chippendale and Clark to start saving money you didn’t know about.
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