The entertaining of clients, customers and staff has always been an important part of business strategy. It can help to strengthen and maintain client relationships and improve staff morale and loyalty. But alongside this are important tax considerations.
What is entertainment?
Essentially, it is hospitality of any kind. This will include eating, drinking, accommodation, and tickets to events such as theatres or football matches to name a few.
Client entertainment
Unfortunately, in most cases, the cost of entertaining clients is not tax-deductible and nor is VAT recoverable. This means that you need to be able to identify your client entertaining so that it is treated correctly in your tax return.
Staff entertainment
On the other hand, staff entertainment is generally allowable for tax purposes provided that it is not merely incidental to client entertainment.
The sting in the tail here is that it may be considered to be a benefit-in-kind on which your employees will have to pay some tax. There are many exceptions to this such as where staff attend an annual event (e.g. Christmas party) where the cost is less than £150 per head or where the benefit can be considered “trivial”. The rules can be tricky to navigate and, if you get it wrong, it can be very costly in back-taxes, interest and penalties.
Be careful with…
Promotional events – events that publicise a business are not considered to be entertainment. However, care needs to be taken with the cost of food and drink provided at such events. Unless it is immaterial, it will be considered client entertaining and so not tax-deductible.
Friday night drinks – most staff have enjoyed after-work drinks at some point or another. However, if the business picks up the tab, then this does create a benefit-in-kind for those individuals – a morale boost with a definite sting.
As with most tax rules, there are all sorts of twists, turns, quirks and exceptions. If you have any queries or concerns at all, please get in touch with us. Perhaps we can discuss it over lunch……!