Entertaining can be a fun part of a business. You can share experiences over food and drink outside of the typical work setting. This can help build relationships among staff and with clients. As the festive period approaches companies often like to celebrate with a Christmas dinner and drinks. This helps the company in terms of keeping employees happy and it gives them opportunity to liaise with key clients.
But before entertaining people through work, it’s important to know what you can claim tax and VAT relief on and how you can be more tax efficient. When it comes to entertainment the rules surrounding VAT could be complex and VAT can only be claimed in certain circumstances.
It is vital to distinguish between business entertainment and employee entertainment. According to HMRC, business entertainment is when the following conditions are met:
- Entertainment is provided
- It’s provided to a person or people who aren’t employees
- The entertainment is provided for free.
This could be any kind of entertainment, for instance provision for food and drink, an entry ticket to a club as well as many other forms of entertainment. This kind of cost will be disallowed as an expense for the taxable purpose, however you can still use the company’s bank account to pay as long as it doesn’t attract any kind of benefit.
Employee entertainment ticks a different aspect as this could be allowable for tax relief but, it could also end up being considered a benefit your employees will be required to pay some tax on. Before planning employee entertainment, it’s important you’re aware of when you can claim tax relief or reclaim VAT on business entertainment.
A staff party or an annual function qualifies as a tax-free benefit for your employees providing that you meet the following conditions:
- The total cost must not exceed £150 per head, per year.
- £150 includes VAT together with any extra costs such as transport and accommodation.
- The £150 is a limit and not an allowance: if the cost is £151, the whole benefit is taxable.
- The event must be primarily for entertaining staff.
- The event must be open to all staff (in that location, if you have several branches or departments).
- The event must not just be for directors unless all your staff are directors.
- The cost of the whole event is an allowable expense for your business.
- You can claim back input VAT but this may be restricted where you are also entertaining customers.
If the cost of the event exceeds £150 per head, it’s a one-off meal or if some employees are left out, then HMRC will not consider it a “qualifying event” and the entire cost of the event becomes a taxable benefit.
If you’re registered under the flat rate scheme then you can’t reclaim any VAT on business entertainment, but those who are standard rated can reclaim to the extent the costs are applicable to staff. If you have two staff and two guests, you could therefore reclaim 50% of the VAT on business entertainment. As with everything when it comes to HMRC, a common-sense approach is advised.
If you run a limited company and are the sole employee or director, having a Christmas party where you invite 10 guests, who happen to be your family members or friends, may be seen as uncommercial. Therefore this has the potential to be disallowed as it’s not for business purposes.
For an event like a Christmas Party, if you’d like employees and directors to invite spouses, friends or families, in addition to customers and suppliers, you could charge a small amount for guest meals, such as £5 per head. This is not considered a business entertainment situation as the meal isn’t being provided for free. Input tax could then be claimed on the cost of the guests’ meals as long as 83p of output tax is accounted for on every meal sold to a guest.
Entertaining employees as a reward or to boost company morale is allowable for tax relief through reclaiming any VAT you pay. On the other hand, if employees are being hosts to a group of clients or customers at an event, there wouldn’t be any tax relief or VAT deduction available. The purpose of the event needs to be to entertain employees in order to be able to claim tax relief or VAT on business entertainment deductions. If entertainment is provided only for partners or directors, the VAT incurred can’t be reclaimed. In this instance, the services or goods aren’t considered to be used for a business purpose. However, when partners and directors attend staff events with employees, you can reclaim the VAT on business entertainment as covered above.
In terms of overseas customer VAT can be reclaimed if it’s “of a kind and on a scale which is reasonable” in HMRC’s words. An overseas customer is considered to be any customer not usually resident or carrying on business in the UK. Additionally, if you or your employees’ attendance is necessary to entertain overseas customers, you should be able to reclaim the VAT on the incurred costs as well.
Keep in mind that you can only reclaim VAT for costs related to entertaining overseas customers and not overseas suppliers or business contracts. You also can’t reclaim VAT on what HMRC considers “corporate hospitality events”, such as golf days, track days, evening meals or trips to night clubs or sporting events. Before planning client and customer entertainment, be aware that you can’t claim it as a tax deduction or reclaim VAT, except on the amount related to entertaining staff and when entertaining customers overseas.
As accountants we can make sure that your taxable supplies are correctly declared. We will be taking this stress from you by implying correct rule. We will assist you with the whole process including communicating with HMRC, calculating your tax affairs and explaining you tax legislation. Our experienced experts will give you complete peace of mind and comply per HMRC guidelines to minimise your tax liability as much as possible. If you’d like accounting help as a small business owner, give our friendly team a call on 0208 249 6007.
Written by Kazi Ashraf