Entertainment expenses – what are the tax implications?
In general, there are two separate headings under which entertainment expenses can fall, namely ‘staff entertainment’ and ‘business entertainment’, with differing tax implications for each.
Staff entertainment is an allowable expense for corporation tax purposes provided that it is wholly and exclusively for the purposes of the trade. Common examples of this are meals, parties or other entertainment undertaken to boost staff morale. The term ‘staff’ generally tends to refer to employees who are on the business’ payroll and being paid a salary, but also extends to cover retired members of staff and the partners of existing and past employees. However, this does not extend to staff of associated companies or other companies in the same group, and any cost incurred on these will not be classed an allowable expense. Similarly, sole traders and partners in a partnership or LLP are not classed as an employee due to having no legal separation from themselves and the business, meaning tax relief also cannot be claimed in this case.
Staff entertainment can also qualify as a tax-free benefit for employees, subject to the following conditions:
- The staff entertainment must be an annual event;
- Open to all employees; and
- Must cost no more than £150 per head per year.
An example of this would be an annual Christmas party, in which all of the employees are invited and the total cost per head would be no more than £150 which is inclusive of all expenses related to the event (such as food, drink, accommodation and travel) plus VAT. There is not a limit to the amount of staff entertainment events that can be held per year, however, the aggregate total cost per head must remain at no more than £150 for all of the events to claim tax relief. If any of the above three conditions are not satisfied, then the whole cost of the entertainment will become taxable on the employee as a benefit in kind. This can occur if the event is not annual, if some employees are excluded and if the total cost per head is greater than £150.
With regards to staff entertainment, there is also potential for VAT registered companies to reclaim any VAT paid on such costs. For companies registered under the flat rate scheme, no VAT can be reclaimed. However, for those registered under the Standard rate scheme, VAT on the costs of staff entertainment can be reclaimed.
Business entertainment, and any incidental costs of such, on the other hand, is not an allowable expense for corporation tax purposes and unlike staff entertainment, VAT registered companies cannot reclaim any VAT paid on the costs of business entertainment. Business entertainment generally refers to the cost of entertaining clients, potential clients, suppliers or any other person who is not classed as an ‘employee’ of the business. This therefore means that when calculating the profit on which corporation tax must be paid, any business entertainment expenses must be added back to arrive at the taxable profit.
There are often times when staff entertainment and business entertainment could appear to coincide.
For example, if an event is held at which both staff and customers attend, the primary purpose of the event must be considered. If the event is held for the purpose of entertaining the customers, this would be classed as business entertainment and all related costs would be disallowable for tax purposes, and any VAT could not be reclaimed. However, if the event is held for the purpose of entertaining the staff, this would be classed as staff entertainment and any related costs to the extent of entertaining the staff, but not entertaining the customers, would be allowable expenditure for tax purposes. In this instance, the VAT can also be reclaimed to the extent of the costs related to staff entertainment; so, at an event held for staff entertainment purposes and with total attendees of 2 staff members and 2 customers, 50% of VAT could be reclaimed.
There is also the question of traveling costs which have been incurred in relation to business entertainment. These costs are incidental to the provision of business entertaining and therefore are not allowable expenses.
If you have any queries or you wish to discuss this further, please do not hesitate to contact Charlotte Dugan.