General Rule for Business Entertainment Expenses

For both corporation tax and income tax purposes, the general rule is that no deduction is allowed for expenses incurred in providing entertainment or gifts in connection with a trade or business.

This rule applies whether a company pays for the expenses directly or reimburses an employee for costs they have incurred exclusively for providing the entertainment or gift.

What is “Entertainment”?

The term “entertainment” is defined broadly and includes hospitality of any kind. For VAT purposes, HMRC provides examples of what this can include:

• Food and drink
• Accommodation in hotels
• Tickets for theatre, concerts, or sporting events
• Entry to clubs or nightclubs
• Use of facilities such as yachts or aircraft to entertain

Expenses incidental to the provision of entertainment are also included in this disallowance.

Exceptions to the General Rule (Corporation Tax and Income Tax)

The general prohibition on deducting entertainment and gift expenses is subject to several specific exceptions.

1. Employee Entertainment

A deduction is permitted for the cost of providing entertainment for a business’s employees. For these purposes, an “employee” includes a director of the company and any person engaged in its management.

However, this exception does not apply if:

• The entertainment is also provided for non-employees (such as clients); and
• The provision of entertainment for the employees is incidental to its provision for the non-employees.

In practice, this means that if an event is primarily for entertaining clients and employees are only present as hosts, the cost of entertaining those employees is not deductible. If an event is exclusively for staff, the cost is generally deductible.

2. Entertainment as Part of a Trade

A deduction is allowed where the entertainment is of a kind that it is the company’s or trader’s business to provide, and it is provided in the ordinary course of that business. This can be either for payment or free of charge for the purpose of advertising to the public generally. For example, a restaurant offering free samples to the general public to promote its menu would fall under this exception.

3. Business Gifts

While gifts are generally not deductible, there are four main exceptions:

Case A: Gifts as part of a trade: Similar to the entertainment exception, a deduction is allowed if the gift is an item which it is the business’s trade to provide, and it is given away in the ordinary course of that trade to advertise to the public generally.

Case B: Gifts for advertising: A deduction is allowed for a gift that incorporates a conspicuous advertisement for the business. However, this exception is subject to two conditions:

1. The gift cannot be food, drink, tobacco, or a token/voucher exchangeable for goods.
2. The total cost of all such gifts to the same person in the same accounting period (for companies) or tax year (for sole traders) must not exceed E50.

Case C: Gifts to employees: The cost of gifts provided to employees is deductible, unless the gifts are also provided to others and the provision to employees is incidental to the provision for others.

Case D: Gifts to charities: A deduction is allowed for gifts made to a charity, the Historic Buildings and Monuments Commission for England, or the Trustees of the National Heritage Memorial Fund.

VAT Treatment of Business Entertainment

The rules for reclaiming VAT on entertainment expenses are also restrictive. The Value Added Tax (Input Tax) Order 1992 prevents businesses from recovering input VAT on the provision of business entertainment. For VAT purposes, “business entertainment” means providing free hospitality to persons who are not employees.

Who is an “employee” for VAT? The definition is specific and includes:

• Current employees.
• Directors and partners.
• Self-employed individuals treated in the same way as employees for subsistence purposes.
• Temporary staff.

• Helpers and stewards essential for running an event.

It does not include former employees, pensioners, job applicants, or shareholders who are not also employees.

Because the VAT block only applies to non-employees, input VAT incurred on entertaining a business’s own employees is generally recoverable. However, if employees act as hosts for non-employees, none of the input VAT can be claimed.

Exception for Overseas Customers The block on recovering input VAT does not apply to the entertainment of overseas customers. An “overseas customer” is one not ordinarily resident or carrying on a business in the UK. However, even if the input VAT is recovered, an output tax charge may be due if there is a “private benefit” to the individual being entertained. This charge can cancel out the benefit of the recovered input tax.

A private benefit charge will not apply where the expenditure is necessary and for strict business purposes. For example:

• Providing basic refreshments like sandwiches and soft drinks during an office meeting to avoid interruption is considered to have a strict business purpose.
• Taking a customer to a restaurant, providing alcohol, or offering general corporate hospitality (like a golf day) is likely to result in a private benefit and a corresponding output tax charge.

Record Keeping

HMRC considers good record-keeping essential, as it underpins accurate tax returns. Research shows that poor record-keeping is a key factor in many incorrect returns, and penalties may be applied for non-compliance.

A “document” is defined broadly as ‘anything in which information of any description is recorded’. This includes both paper documents and electronic records stored on devices like hard drives, memory sticks, or smartphones. Businesses must ensure they maintain adequate records to support any claims for deductions.

Summary: What Can and Cannot Be Claimed

Category	Examples of Allowable Costs	Examples of Disallowed Costs
Clients/Suppliers	Gifts for advertising with a conspicuous logo costing E50 or less per person per year (not food, drink, tobacco, or vouchers).Free samples provided to the public generally as part of the ordinary course of trade.	Meals, drinks, event tickets, hotel stays, or any other form of hospitality. Gifts costing more than £50, or gifts of food, drink, or tobacco.
Employees	Costs of staff parties, team- building events, and other functions for employees only.	Costs of entertaining employees where it is incidental to the entertainment of clients or other non-employees.
Mixed Events (Employees & Clients)	The employee portion may be deductible only if it is not incidental to entertaining the clients. This is a high bar to meet.	The entire cost is likely to be disallowed, as the employee element will be seen as incidental to client hospitality.

Cited sources

1. https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch214000
2. https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch211000
3. https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit43200

Additional relevant sources

1. https://www.legislation.gov.uk/ukpga/2009/4/part/20/chapter/1/crossheading/business-entertainment-and-gifts
2. https://www.legislation.gov.uk/ukpga/2005/5/section/45
3. https://www.gov.uk/hmrc-internal-manuals/cotax-manual/com100
4. https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch205200
5. https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch202025