Business entertainment means the provision of free or subsidised hospitality or entertainment. The person being entertained may be a customer, a potential customer or any other person.
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We’ve broken it down into 3 categories:
1) Clients and potential customers
Client entertainment usually isn’t allowable for tax purposes. Examples may include:
Promotional events arranged to advertise products are not in themselves business entertainment but the cost of any food, drink or other hospitality provided as part of the event is disallowable.
Sponsoring a sporting or cultural event is allowable if the business receives publicity, but the cost of giving free tickets or private boxes etc to clients isn’t allowable.
Business gifts are only allowable if they incorporate a conspicuous advert for the company, such as a logo, and the cost is below £50 per person per year. However, the gift cannot be food, drink, tobacco or vouchers.
The cost to a business of giving away its own goods or services for the purpose of advertising those goods or services to the general public is not business entertainment expenditure. Examples include a manufacturer giving out free sweets to the general public or a trial run of hotel facilities to a bulk buyer or a free meals to restaurant critics.
Staff entertaining such as a Christmas party or sporting event is allowable, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers.
So if a business takes out a client to a restaurant, the cost for the staff who also attend won’t be allowed.
But if the only attendees are employees, then the cost will usually be allowable. Also allowable are costs for subcontractors or self employed “workers”.
However, there may be additional P11D taxes for benefits in kind (payable by both the company and staff) unless the entertaining relates to one or more annual events that are open to all staff and cost less than £150 per person in total.
A business meeting that involves significant food/drink and is only between directors and doesn’t involve any other employees may still qualify for a corporation tax deduction. However, it will then usually be subject to P11D taxes and so it isn’t usually efficient to claim a corporation tax deduction.
In addition to the examples mentioned above, costs that are incidental to entertainment are also disallowed for tax purposes. For example, travelling costs to a client meal are also barred. As would the costs of maintaining an asset, such as a yacht, used for business entertainment.
The key legislation is S1298 Corporation Tax Act 2009 and S45 Income Tax (Trading and Other Income) Act 2005.