Are you able to claim on the cost of entertaining someone, and what are the implications for VAT? Chief accountant at FreeAgent Emily Coltman gives the answers.
* Please note, in this article the guidance on when VAT can be reclaimed relates only to businesses that are registered for VAT. If your business is not registered for VAT it cannot reclaim any VAT at all, apart from in certain circumstances when it subsequently registers.
The answer to the question of ‘can you claim tax relief for client entertainment’ is that it would depend on who the ‘someone’ is that you are entertaining.
If you are entertaining a bona fide employee of your business, and the entertainment relates to their work – for example, you’re thanking them for good work that they have carried out – then you would be able to include that cost under ‘staff entertaining’ and claim tax relief on it, and also reclaim any VAT you paid on the cost of the entertainment.
For any entertainment for staff that’s not an annual event (such as a Christmas party), open to all your staff and costing over £150 a head per attendee, you can still claim the cost in the same way, but it might be a taxable benefit for your staff.
But, if you are entertaining anyone else, whether that’s a client, a supplier, your mentor, or whoever it may be, then you wouldn’t be able to claim tax relief on the cost nor reclaim any VAT on it. You still need to record that cost in your accounts, under a category of ‘business entertaining’, but when you’re working out how much profit to pay tax on, you would have to make sure you add back that cost to the profit from your accounts.
If the event is a mixed event for customers and staff, you need to consider the primary purpose of the event. Any event that’s for the purpose of entertaining customers would all be disallowable for tax and VAT. Any event that’s for entertaining staff, you can claim the cost and VAT of entertaining the staff but not of entertaining the customers – so be prepared that you may have to divide the cost up between two categories, and split the VAT and only claim part of it.
Who are your employees?
HMRC only allows tax relief and the claiming of VAT on the cost of entertaining your business’s employees, and they are very strict about who counts as ‘an employee’. Former and previous employees don’t qualify, nor do subcontractors or shareholders who do not work in the business. In my experience, HMRC expects ‘an employee’ to be someone who is on your business’s payroll and being paid a salary.
If you entertain anyone else, this counts as ‘business entertaining’ rather than staff entertaining, and you can’t claim either tax relief or VAT on the cost of entertaining those people.
If you’re a sole trader, or a partner in a partnership or LLP, remember that you don’t count as an employee because legally there’s no difference between you and the business, and therefore you can’t claim tax relief or VAT on the cost of entertaining yourself.
What is entertaining?
HMRC defines ‘entertaining’ as providing free or subsidised hospitality. Here are a few examples they give of what can count as ‘entertaining’:
- food and drink
- accommodation, eg hotels
- sporting events and facilities
- use of capital assets such as yachts and aircraft
- theatre and concert tickets
- entry to clubs and nightclubs
- business gifts
- free samples
- payments made to third party business entertainment organisers
- when you provide entertainment or hospitality only for the directors or partners of your business
Entertaining employees: Benefit
When you entertain your employees, this may be allowable for tax relief in your business’s accounts, but it could also be a benefit on which your employees have to pay some tax.
For example, if you’re hosting an annual event such as a summer barbecue or Christmas party, that is open to all staff and costs less than £150 per guest who attends, then this is what HMRC calls 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 of your employees are excluded, or if the cost per head is over £150.
Entertaining employees: VAT
The cost of entertaining employees as a reward for good work, or to boost office morale, is classed as staff entertaining, which is allowable for tax relief and on which you can reclaim any VAT you pay.
But if your employees are acting as hosts to a group of customers at an event, then that then counts as business entertaining and there’s no tax relief or VAT deduction available on any of the cost of the event.
For tax relief and VAT reclaim to be allowed, the purpose of the event has to be to entertain employees.
So if you have an event with a mixed group of employees and non-employees and the purpose of the event is to entertain everyone equally, then you can only claim back the VAT on the cost of entertaining your employees. For example, if you have a staff Christmas party and allow your employees to bring a friend, you’d have to work out the amount of VAT you paid on the cost of entertaining your employees and only claim that. You can’t claim the VAT on the cost of entertaining their friends.
When your business has no employees other than directors
If your business has one or more directors, but no other employees, then the issue becomes more complicated.
That’s because HMRC says that the cost of providing entertainment only to directors or partners doesn’t qualify for tax relief or a VAT deduction. But they also say that if the directors or partners are travelling ‘away from their normal place of work on a business trip’, then any VAT suffered on the cost of travel, accommodation and meals can be reclaimed. The rules for tax relief would mirror this, and this also applies to employees, sole traders, partners, and to subcontractors who are part of the team and treated like employees.
So if you want to have a celebration meal for two directors who are the only employees of the business, make sure that the meal takes place away from the usual place of work and as part of a business trip which the directors would have made anyway, for example to see a client.
But remember that this is a grey area, so if you are not sure whether you can claim tax relief or reclaim VAT on a particular cost you should seek professional advice from an accountant who will be able to advise you.