In most cases, the cost of entertaining is not tax-deductible, and VAT is not recoverable on expenditure. However, HMRC rules are complex, and VAT can be reclaimed in certain circumstances. So what business entertainment expenses can you claim? Is client entertainment tax deductible? The exception to this general rule is staff entertainment.
In principle, an employee is liable for Income Tax on the value of any benefit provided by their employer. This includes the cost of any staff entertaining. It even includes so-called benefits such as the cost of lunch provided at a staff meeting… Fortunately, there are a couple of ways to get around this problem (keep reading).
Furthermore, the employer is also liable for Class 1A National Insurance at 13.8% on the cost of the staff entertaining. The cost of entertaining, for both Income Tax and National Insurance purposes, must include VAT, even if the employer is able to reclaim it. However, it’s not all bad when it comes to business entertainment expenses as HMRC allow a tax deduction for the cost of staff entertainment. This includes costs relating to director shareholders and all business owners, i.e. business partners and sole traders, who take part in staff entertainment
Exemption 1 | The Annual Party Exemption
A cost of up to £150 per head on an annual staff function (such as a Christmas or Summer party) can be exempted from both Income Tax charges and employer’s National Insurance. And, you can in fact have several functions covered by the exemption as long as the collective cost per head over the tax year does not exceed £150.
What you need to bear in mind:
- The exemption only covers annual events: either a Christmas party, Summer party or a similar event. It does not cover casual hospitality, such as the employer paying for after work drinks.
- The invitation must extend to all members of staff. It can be restricted to staff working at a particular location, such as a branch or regional office, but it cannot be restricted to differing management levels.
- Should the total cost of the staff entertainment expenses exceed £150 per head, none of the costs can be covered by the exemption. However, as mentioned above; you can hold several events and it will be allowable as long as the total aggregate amount does not exceed £150 per head.
An important thing to remember is that you can use it in conjunction with a promotional event and extend the invitation to potential customers, just as long as costs are charged per head.
Exemption 2 | The employer voluntary settlement exemption
As an alternative to Exemption 1, benefits in kind for an employee are tax and NI exempt if they cost you, the employer, no more than £50 per head, taking account of all the costs of providing it.
Need advice on business entertainment expenses?
Being savvy with your business entertainment expenses plays a big part in running a successful business, regardless of its size. Claiming business expenses accurately is a simple way to keep your business tax efficient – it reduces your profit, which in turn reduces your tax payments.
Thomas Nock specialises in small business tax deductions and small business accounting. Our team can offer expert expenses support for businesses. Get in touch with us today if you are not sure whether your next event is tax deductible. Call 01384 261300 or visit our website for tax advice for your business.
If you have found this blog helpful. you may wish to read our previous blog on Small Business Bookkeeping.