While the term “entertainment” might bring to mind top-price seats to sporting events funded by generous expense accounts, almost everyone in business spends money on entertainment. It might be as routine as coffee with a client or the annual staff Christmas party.
The general rule for entertainment costs is that they are usually not tax deductible, except in some restricted circumstances. The rules for companies, sole traders and partnerships are broadly the same.
Business entertaining used to be entirely tax deductible as it was (and still is) undertaken with business purposes in mind. However, excessive entertainment costs came to be seen as an abuse of the law and so legislation was brought in to disallow business entertaining. The purpose of the entertaining is not considered a relevant factor. For example, many small business owners work from home, and they arrange to meet clients and other business contacts at a coffee shop. Even though the purpose of the expenditure is a business meeting, and the price of a latte and muffin is cheaper than hiring a conference room (not to mention easier to arrange), the cost is not tax deductible.
Entertaining may be tax deductible if there is a contractual obligation to provide hospitality. For example, sports teams might be required to provide a meal and refreshments to a visiting sports team by their union or league.
There might be a “quid pro quo” arrangement in place whereby hospitality is extended instead of payment to the recipient, in which case the expenses of entertainment are allowable as they are in effect payment for goods or services provided by the recipient.
There are separate rules for staff entertaining. These rules apply to employees only, and not sub-contractors and other self-employed workers. The rules extend to retired and past staff members and employees’ significant others. Entertaining staff is tax deductible providing it is wholly and exclusively for the purposes of trade. However, the cost of entertaining is a reportable P11D benefit that gives rise to Class 1A National Insurance for the business and an income tax charge for the employee. Employers who want to entertain their staff without having complicated P11D calculations can include costs on a PAYE Settlement Agreement and pay the tax due on behalf of their employees. Some occasions would not give rise to a P11D benefit, such as:-
- Annual functions, e.g., Christmas parties. If the cost per head is less than £150 in the year for all functions arranged annually, there are no tax complications;
- Meals provided on the employer’s premises or in a canteen;
- Meals purchased while travelling (there are separate subsistence rules)
The rules for entertainment costs are complex and encompass other areas of law, such as travelling and subsistence. Additionally, what might be considered entertaining in one industry could be seen as a normal business expense in another. It is, therefore, important that you seek professional guidance before relying on any of the above general advice.