Entertaining people can be a very enjoyable part of being in business – sharing time, food, and drinks away from the office can help build and strengthen working relationships. But the question is, when can you claim tax relief on the cost of entertaining someone, and what about VAT?
Here are a few important things to bear in mind when it comes to tax and VAT on entertainment costs. Please note, in this article the guidance on when VAT can be reclaimed relates only to businesses that are registered for VAT. If your business is not registered for VAT it cannot reclaim any VAT at all, apart from in certain circumstances when it subsequently registers.
- Who are your employees?
HMRC only allows tax relief and the claiming of VAT on the cost of entertaining your business’s employees, they are very strict about who counts as “an employee”. Former and previous employees do not qualify, nor do subcontractors, or shareholders who do not work in the business. From understanding, “an employee” must be on your business’s payroll and being paid a salary.
If you are entertaining anyone else, that counts as “business entertaining” rather than staff entertaining, and you cannot claim either tax relief or VAT on the cost of entertaining them.
Regarding what happens when a business has salaried directors, but no employees, please see section 5 below.
- What is entertaining?
HMRC states that “entertaining” is providing free or subsidised hospitality. Here are examples they have provided of what can count as “entertaining” – this list is not exhaustive:
- Food & drink
- Accommodation (e.g. hotels)
- Theatre & concert tickets
- Sporting events & facilities
- Entry to clubs & nightclubs
- Use of capital assets such as yachts & aircraft
- Payments made to third party business entertainment organisers
- Free samples
- Business gifts
- Providing entertainment or hospitality only for the directors or partners of your business
3. Entertaining employees: Benefit
When you are entertaining your employees, this may be allowable for tax relief in your business’s accounts, but it could also be a benefit on which your employees have to pay some tax.
If you’re hosting an annual event, such as a summer boat trip or Christmas party, that’s open to all staff and costs less than £150 per guest present, then this is what HMRC call a “qualifying event” and will not be a taxable benefit for your staff.
But if any of these three conditions aren’t met, then the whole cost of the event becomes a taxable benefit – for example if it’s a one-off meal to celebrate a new contract, or if some employees are excluded, or if the cost per head is over £150.
4.Entertaining employees: VAT
The cost of entertaining employees as a reward for good work, or to keep up morale, is staff entertaining, which is allowable for tax relief and on which you can reclaim any VAT you pay.
But if your employees are acting as hosts to a group of customers at an event, then that counts as business entertaining and there is no tax relief or VAT deduction available on any of the cost of the event.
For tax relief and VAT reclaim to be allowed, the purpose of the event must be to entertain employees.
If there is an event with a mixed group and the purpose of the event is to entertain everyone equally, then you can claim back the VAT on the cost of entertaining your employees only. For example, if you have a staff Christmas party and allow your employees to bring a friend, you’d have to work out the amount of VAT you paid on the cost of entertaining your employees and only claim that. You cannot claim the VAT on the cost of entertaining their friends.
- When your business has no employees other than directors
If your business has one or more directors, but no other employees, then the issue becomes more difficult.
HMRC say that the cost of providing entertainment only to directors or partners does not qualify for tax relief or a VAT deduction.
But they also say that if the directors or partners are travelling “away from their normal place of work on a business trip”, then any VAT suffered on the cost of travel, accommodation and meals can be reclaimed. The rules for tax relief would mirror this, and this also applies to employees, sole traders, partners, and to subcontractors who are part of the team and treated like employees.
So if you want to have a celebration meal for two directors who are the only employees of the business, make sure that the meal takes place away from the usual place of work and as part of a business trip which the directors would have made anyway, for example to see a client!
This is a grey area so if you are not sure whether you can claim tax relief or reclaim VAT on a particular cost, please give us a call on 0208 249 6007 for free advice our experts are always happy to help!
Written by Irina Strucere