With the festive season almost upon us, we look at how you can keep HMRC happy when making claims for gifts and entertainment.
At this time of year, one of the most frequently asked questions relates to claiming back money spent on Christmas entertainment and gifts, and ultimately, whether it’s allowed. The short answer is that it is fine to make a claim, so long as you consider the different tax rules.
What are the rules?
HMRC has set out rules for client entertainment, staff entertainment, gifts and what’s known as trivial benefits. Once you understand these, making a claim is straightforward. Let’s look at each one in turn.
First, it’s important to understand the definitions HMRC uses for describing entertainment. ‘Business entertainment’ relates to forming and strengthening business relationships, discussing strategy and projects. Taking a client to dinner where the purpose is to agree a deal would qualify, so long as the amount spent isn’t excessive.
However, hosting a box at a sporting event is more than likely going to fall into the ‘Non-business entertainment’ category, as this describes social engagements.
What are the options on business entertainment?
A limited company can pay for a legitimate ‘Business entertainment’ expense. Even though there’s no tax benefit to doing so, it’s worth doing because, in the example of dinner, if you pay the bill with your own money, you’ll be paying with cash that’s already been taxed. Should the situation arise where you do pay with your own money, retain the receipt, and use it to claim back the amount spent.
As a rule, if the occasion is social then it’s best not to involve your company. The primary reason for this is that it would incur Corporation Tax and National Insurance. The cost of entertaining is specifically listed as a type of expense that can’t be deducted from taxable profit. The same applies to VAT on the expenses – it can’t be reclaimed.
Of course, it’s not just clients you could entertain. You might want to treat employees too. An annual Christmas function or a BBQ are covered by the rules, and one-person limited companies can use the expense option too.
Whatever the size of the company, as you’d expect, there’s specific guidance to follow:
- All employees must be invited to attend. It can only be an annual event.
- This means that ‘one-off’ events to celebrate a new contract, for example, don’t meet the ‘annual’ criteria.
- An annual limit of £150 per person applies. Anything over this amount is a taxable benefit in kind, which employees are then liable for. It’s therefore worth keeping a close eye on costs throughout the year.
- Employees can bring a guest and they too are bound by the £150 limit, bringing the total amount per couple to £300.
- It’s important to acknowledge that the £150 is not an allowance. An event must take place and receipts need to be kept so the expense can be justified and prove the £150 limit was observed.
If the company is VAT registered, then staff entertainment costs can be claimed as expenses for Corporation Tax and the VAT paid. But note that if an employee does bring a guest, the related VAT for the guest’s expenses can’t be reclaimed from HMRC.
There are times when you might want to send a gift, perhaps at the end of a project, or to say thank you to a client for their custom at Christmas. This can be claimed provided it has a ‘conspicuous’ logo or advert for the company on the gift.
In addition, the gift shouldn’t exceed £50 and should be limited to one gift per client, per year. Food, drink, tobacco and vouchers aren’t allowed regardless of whether they carry an advert or not. HMRC lists diaries, pens and mouse mats as examples of items that qualify.
HMRC regards ‘trivial benefits’ as gifts that are given to staff that don’t constitute a ‘benefit in kind’. These gifts don’t need to be reported to HMRC, but as ever, it’s important to observe the rules governing this type of expense. If the following four rules aren’t met, then the gift becomes taxable.
- Each gift can’t exceed £50 in value
- Cash and cash vouchers don’t qualify
- Performance-related gifts are not allowed
- It shouldn’t be part of an individual’s contract
What about directors?
Directors can also receive gifts up to a value of £50. It’s a good way to get a little more from your company provided the total over a year doesn’t exceed £300. At inniAcounts, we encourage our clients to follow this guidance to make sure they don’t raise the attention of HMRC:
- Don’t spend the full allowance in one transaction. Regularly buy £50 vouchers for example, rather than buy six in one go.
- To help, use them to mark special occasions throughout the year such as a birthday, Christmas or anniversary.
- But be careful not to use a regular subscription as trivial benefits. If staff believe a subscription will continue indefinitely then HMRC might consider it a contractual arrangement.
- Purchase directly from the company bank account rather than back-claiming the cost.
And family members not involved in the company?
Yes, they can be given gifts, but they would form part of the director’s yearly allowance. In the case of employing a member of the family, (not as a director), then gifts follow the same rules as non-family employees. If there are no other employees, then apply the £300 rule.
Of course, accountants manage these rules every day, so, if in doubt, get help.
This guide was written by Greg Timson FCCA, Chief Accountant at inniAccounts
Greg Timson is the Chief Accountant at inniAccounts, which provides accountancy services to contractors, consultants and small businesses.
Greg holds both AAT and ACCA qualifications and has over 14 years’ experience helping clients meet their accountancy needs throughout the financial year. He heads up the compliance and technical aspects of inniAccounts’ practice and is an expert at helping contractors and consultants with complex tax matters.
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