Are entertainment expenses tax deductible?

Entertainment expenses are not usually tax deductible for businesses in the UK. This means that you cannot claim tax relief for these expenses to reduce your tax bill, and you cannot claim the VAT back on expenditure either. However, there are circumstances that are not quite so clear cut.

Taxation and VAT are complex systems – there will be exceptions to every rule and you might need personalised advice. If an event is only for staff, the expenses can be tax deductible because they are classed as an employee reward, not entertainment. We will cover various situations below, so you can understand the full scope of tax deductible expenses and what you might be able to save.

What does tax deductible mean?

First, let’s understand what the term ‘tax deductible’ means in practice.

If an expense is tax deductible, then it can be taken off your taxable income. This means you don’t pay tax on it. The amount that you do pay tax on is called the taxable profit.

Here’s how it works:

Imagine that your business has a turnover of £50,000. £10,000 is allowable expenses, which are essential business costs that are not taxable. You can take this £10,000 off your turnover total when paying tax – so you will only pay tax on £40,000.

Despite the fact that entertainment expenses aren’t usually tax deductible, many other business expenses are. These include:

• Office costs
• Travel
• Uniforms
• Staff salaries
• Raw materials
• Insurance and bank charges
• Business premises costs
• Advertising costs

Can any entertainment expenses be tax deductible?

As with any HM Revenue and Customs (HMRC) system, there are exceptions to the rule; some situations won’t quite fit the mould. These are usually to do with events that are for your staff, which can be classed as a reward rather than entertainment. You can put company events such as the annual Christmas party through the books, and this will be tax deductible.

A few warnings:

• The total spend per head cannot be more than £150 annually. If the amount is higher than this, it will be a benefit in kind and you will have to pay tax on the whole amount, not just the spend that exceeds £150.
• Your staff cannot entertain clients when you claim tax relief. If employees are deemed to be hosting clients at an event, this is no longer classed as a reward – it is entertainment.
• If there are staff and clients at the event, only staff costs will be tax deductible. Be careful to work this out accurately.

Putting entertainment expenses through your company

You can still put entertainment expenses through your company to save on income tax – they just won’t be tax deductible. Anything that is a genuine business cost can be put through your company.

Entertainment expenses and tax – some examples

Here are some examples to help you understand the various permutations regarding entertainment expenses and tax:

Scenario 1: You hold your annual Christmas party, providing food, drinks and paying for taxis home. The cost is £130 per head.

Are the expenses tax deductible?: It all depends on who is attending the party. If the party is only for your staff, then the costs will be tax deductible as they are less than £150 per head. If clients attend too, their costs will not be tax deductible.

Scenario 2: You are holding a conference, where you invite clients and other key people from your industry. Your employees take some important clients out for lunch during a break.

Are the expenses tax deductible?: You may be able to offset costs of the conference if they are classed as being solely for the purpose of the trade. However, lunch expenses will not be tax deductible as your staff are hosting, therefore they become classed as entertainment costs.

Scenario 3: You want to work with a new company and you have the opportunity to meet the director. You talk about business over dinner and you pay the bill, putting it through the business.

Are the expenses tax deductible?: The expenses will not be tax deductible. This is entertaining, and it doesn’t matter whether the person you are with is an existing client or a prospective client.

What about VAT? Can I claim back VAT on entertainment expenses?

As with tax deductions, entertainment expenses usually can’t be included in your VAT return. You may be able to reclaim some VAT if your expenses are classed as being solely for the purpose of the trade. You might also be able to make tax deductions for staff costs such as rewards and incentives.

Getting your head around entertainment expenses and your tax obligations

Whilst most entertainment expenses are not tax deductible, as mentioned above, there are circumstances where you will be able to reduce your tax bill. As tax is such a complicated area, these may be circumstances that are unique to your business that we haven’t covered here. There might also be expenses that you simply haven’t considered, that would be tax deductible.

It’s perfectly possible to submit your own accounts to HMRC, and to complete your own tax Return. However, you could well be saving yourself money on your tax bill in ways that you haven’t considered. In our opinion, this is the duty of your accountant – to ensure you aren’t paying any more tax than you are legally obliged to pay. Make sure your accountant is doing all they can to minimise your tax bill, and if you’re not happy with the service they are providing, you can always move to a new accountancy practice.