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 have a complex set of rules which determine the tax treatment of entertainment costs – a notorious ‘grey area’ due to the fact that most scenarios where clients are being entertained also involve providing a benefit to those hosting events.
What counts as an ‘entertainment’ expense?
According to HMRC, there are two types of entertainment expense.
- ‘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 true ‘business’ costs, you (personally) will not be taxed on the benefit of the cost of entertainment.
Benefits-in-kind attract additional income tax and NIC liabilities for directors.
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, once again, the rules are complex, for example; if an employee is acting as a ‘host’, or an ‘overseas customer’ is included.
Is it still worth putting business entertainment expenses through my company?
Although entertainment expenses cannot be offset against your company’s Corporation Tax bill, they are a legitimate business expense and represent a more tax-efficient way of paying for entertainment costs 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?
You can reclaim one type of entertainment expense back from your company without the need to consult an HMRC tax manual – the costs related to an annual company event, typically the Christmas party. As long as you don’t reclaim more than £150 per head. You can find out more in this dedicated guide.