Entertaining clients – can your company pay, and what’s tax-deductible?

There may be times when you want to drum up some new business by entertaining a would-be or existing client, but you may be unsure if you can reclaim the costs from your contracting business.

HMRC has a complex set of rules that determine the tax treatment of entertainment costs – a notorious ‘grey area’ because most scenarios where clients are being entertained also involve providing a benefit to those hosting the events.

What counts as an ‘entertainment’ expense?

According to HMRC, there are two types of entertainment expenses.

• ‘business entertainment’ of clients – e.g. discussing a particular business project or forming or maintaining a business connection
• ‘non-business entertainment’ of clients – e.g. entertaining a business acquaintance for social reasons

The definition is important, as although entertainment expenses are not typically deductible against your company’s profits, if they are genuine business costs, you (personally) will not usually be taxed on the benefit of the entertainment.

If the cost is genuinely for business entertainment – such as discussing a project with a client – it generally won’t count as a benefit-in-kind, so there’s no extra personal tax to pay. However, if there’s any element of personal benefit, HMRC could still assess it as a taxable benefit.

What about the VAT element? Can this be reclaimed?

Unless you are hosting an event for your employees, which is wholly and exclusively for the purpose of the trade (see below), you cannot reclaim VAT on business entertainment.

If you host an event which contains both staff and non-staff personnel, you can only reclaim the VAT element on your employees’ costs.

However, the rules are once again complex. For example, VAT may be reclaimable when an employee is attending as a host or when entertaining an overseas client.

VAT on entertaining UK clients is generally blocked, but VAT on overseas client entertainment can sometimes be reclaimed, as long as there’s a clear business purpose and you retain supporting evidence.

For more information, read VAT Notice 700/65. Also, try this excellent ICAEW article, including various scenarios here.

Reimbursing directors or employees

If you pay for entertainment personally and the company reimburses you, the tax rules are the same – the expense still won’t be deductible for Corporation Tax, and VAT is not reclaimable (unless it’s a qualifying staff event or overseas client entertainment). As with all expenses, keep clear receipts and note the business reason for the event.

Keep proper records

Even if the expense is not tax-deductible, HMRC expects you to keep proper records. This includes the date of the event, the attendees, the location, and the business purpose. You should also keep itemised receipts showing the nature of the cost.

Is it still worthwhile to put business entertainment expenses through my company?

Business entertainment costs are still processed through your company as an allowable expense, but they are not deductible for Corporation Tax purposes. That means your company records them in the accounts, but they don’t reduce your taxable profit.

Although entertainment expenses cannot be offset against your company’s Corporation Tax bill, they may still represent a more tax-efficient way of paying for entertainment than using your personal post-tax income.

If you decide to pay for business entertainment costs out of your own pocket, you will have to pay income tax on the dividends/salary you extract from your company first.

Clearly, any expenses you do process through your company must be genuine business costs, and not ‘excessive’. Taking a prospective client for a £1,000 business lunch, for example, would be hard to justify.

If you have any doubts over a particular expense, we recommend you ask your accountant for their opinion.

What about an annual party for your own company?

The one exception where entertainment is tax-allowable and VAT-reclaimable is the annual staff event – often a Christmas party. You can spend up to £150 per head (including VAT), covering employees and their guests, without triggering a benefit-in-kind. You can find out more in this dedicated guide.