When it comes to business expenses, it’s important to know which can be claimed as allowable expenses to reduce the overall amount of tax your company must pay. In this blog, we focus on business entertainment expenses – the different types and whether they are allowable.
What is an allowable business expense?
An allowable business expense is where you can offset the costs to reduce your taxable profits. This reduces the amount of tax you have to pay, in effect clawing back some of that cost. An example would be if £1,000.00 was spent on allowable activity, then you would get tax relief at the relevant rate of tax you paid. If you paid tax at 20%, the effective cost would be £800.00 (£810.00 for company’s paying CT at 19%).
If the activity was not allowable, the cost would be the full £1,000.00.
Types of business entertainment expenses and if they are allowable
The business can pay for client (current or prospective) entertaining but it is not an allowable cost to be offset against your taxable profits. For limited companies, it is still worth paying for through the business as it reduces the income tax you would have to pay if you withdrew the funds personally. No VAT can be claimed either.
Unlike client entertaining, staff entertaining is an allowable entertainment expense. This means the business can get tax relief on the cost of staff entertaining. The only stipulation is that you cannot exceed £150.00 per head for staff entertaining per annum. This doesn’t have to be one event and it can be spread throughout the year. VAT can be claimed for staff entertaining.
If the costs do exceed the £150.00 per head then the event tips you over the threshold. In this case, the whole amount is taxable and would become a benefit in kind. For example, if event 1 costs £100.00 per head and event 2 costs £55.00 per head, the whole of the £55.00 would be the benefit in kind, not just the £5 that exceeds the threshold.
A lot of people get confused and think that client entertaining is marketing, which is the wrong assumption. If you wine and dine your future or existing clients or take them to a sports event, this isn’t seen as marketing. This is because it is completely entertainment-based and therefore HMRC deem that it is not allowable.
Allowable marketing events have to tick a few boxes before you the expense is deemed to be allowed. The more you points you satisfy, the more likely it is to be allowable:
- Have a clear goal – for example, to promote a new service asset you now offer
- Set out a program or itinerary
- Have a list of all attendees
- Have a speaker
- Include visuals (flyers or a presentation)
If entertainment is one element of the marketing strategy then this would give you the right to claim relief on the costs.
We hope this guide to the different types of business entertainment expenses, and whether or not they are allowable, has been useful. If you have any further queries on this topic, please do not hesitate to get in touch.