What is Entertaining?
First, let’s start by defining what ‘entertaining’ means in this context. It is the provision of hospitality of any kind by a business, including drinks, meals, parties, tickets to events, accommodation, and trips.
By Chris Davies
In the United Kingdom, the tax treatment of staff and client entertaining is distinct, so it is essential for businesses to understand the differences to ensure that the tax treatment is correct.
Staff Entertaining
Staff entertaining refers to entertainment expenses that a business incurs for the benefit of its employees.
It is usually allowable as a deduction for Corporation Tax purposes. This means businesses can deduct the cost of staff entertaining from their profits before calculating their taxable income.
However, this is not a carte blanche to expense everything. The tax relief only applies if the entertaining is wholly and exclusively for the purposes of the trade, and the event is open to all staff members.
An important point to note is the annual exemption of £150 per staff member for events such as a Christmas party or annual staff function. As long as the cost doesn’t exceed £150 per head, per year, it is exempt from Income Tax and National Insurance Contributions (NICs) under the annual party exemption.
However, if the costs exceed this threshold, the full amount – not just the excess – becomes taxable as a benefit in kind and needs to be reported on each employee’s P11D, or the employer can choose to settle the tax due via a PAYE Settlement Agreement (PSA).
Businesses can generally recover the VAT on costs (subject to the usual VAT rules) incurred on staff entertaining.
Client Entertaining
In contrast, client entertaining refers to any entertainment expenses a business incurs for non-employees, such as customers, clients, potential clients, or other business contacts.
Client entertaining is not tax deductible so these costs must be added back into business profits, when calculating their Corporation Tax.
Furthermore, VAT (Value Added Tax) on client entertaining cannot typically be reclaimed.
Conclusion
While there are clear differences in the tax treatment of staff and client entertaining, in real life the situation can become blurred or grey so it’s vital that businesses maintain accurate records of all entertaining expenses including who was present at the event.
As tax law can change, businesses should always consult a tax professional or advisor to ensure they’re compliant with the current regulations and benefit from any potential tax efficiencies.
This is a general overview and is not intended as a substitute for professional advice. Please consult with a tax professional for advice that considers your specific circumstances.
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