When a company incurs entertaining expenditure – what are the tax rules?

Most people understand that client and customer entertaining is not allowed as a business deduction, but what about related expenditure such as travel, and what about staff entertaining?

Entertaining Customers, Clients and Suppliers

This category includes any non-staff related entertaining and the expenditure is specifically not allowed as a expense deduction for corporation tax, even though the expense is a genuine business expense.

If you host events such as all day courses and you advertise the price as inclusive of lunch you will not have to treat the cost of the lunch as business entertaining; it will depend on the contract.

So any entertaining provided for non-employees is specifically disallowed, and the costs relating to members of staff also attending would also be added back in the tax computation.

Incidental costs of the entertainment are linked to the entertaining and also disallowed so for example, travel to the event and potential overnight accommodation. HMRC can be a little more forgiving, in that, the travel of an employee to meet a client for lunch would, be allowed as the travel is not itself incidental to the entertaining – it relates to the need for the employee to meet the client. If the employee and client travel together then the cost becomes incidental to entertaining and disallowed.

Entertaining Employees

Entertaining provided to employees is tax deductible, and any VAT incurred on it is also recoverable, see our blog on Christmas Parties for your staff.  As the main expenditure is acceptable, clearly incidental expenditure will also be fine.

Sometimes there is confusion over who is included in “staff”.  HMRC have defined “staff” to include retired members of staff and the partners of existing and past employees.

In a partnership, the partners are not staff  so the element relating to the partners should also be disallowed.  This would also apply to freelancer workers who are self-employed, only staff entertaining is tax deductible.