Entertainment is not an allowable expense that may be claimed against profit to reduce corporation tax. However, in some circumstances, Input VAT may be reclaimed.
To determine what expenses may be deducted under the description of 'entertainment' then a distinction needs to be made between business and personal.
Personal Entertainment
No personal entertainment costs are either tax deductible or reclaimable for input VAT as it is not a business cost.
Business entertainment:
To meet the criteria for business entertainment, the expense must have been:
- Not provided to an employee of the business
- Was provided free of charge to the recipient
Definition of an employee for the purpose of business entertainment
- A person directly employed by the business
- A director of the company
- A person engaged in managing the company
- A self-employed person working for the company who receives expenses in the same manner as an employee of the company, i.e. subsistence payments
- Helpers or stewards essential in running company events
Who are not my employees for business entertainment purposes?
- Ex-employees
- Retired employees
- Shareholders
For Professional Contractors and Freelancers a director is an employee for tax purposes of their own limited company.
Expenses that are considered to be business entertainment
- Provision of food and drink
- Provision of accommodation
- Theatre and concert tickets
- Sporting events and facilities
- Entrance to clubs and nightclubs
- Use of capital assets such as aircrafts and yachts for entertaining
Should the costs of these be put through the company they would be added back to profits in the calculation for corporation tax and a P11D charge incurred by the recipient.
Input VAT on business entertainment
Input VAT is not reclaimable on business entertainment.
If the director entertains clients when the director has worked a late shift this would be a combination of subsistence (for the director) and business entertainment for the clients.
The input VAT on the proportion of expense attributable to the director may be claimed, but not that of the clients.
For Professional Contractors and Freelancers registered on the Vat Flat Rate Scheme, no input VAT may be re-claimed, even though for tax purposes a claim for subsistence may well qualify.
For example
You take your recruitment consultant and client out for dinner to discuss terms and conditions of a proposed contract after an 8 hour shift.
The input VAT may be claimed on the cost of the entertainment for the director because it is combined subsistence and entertainment, but not for the business associates.
The cost of the expense is not tax deductible.
Entertainment expenses where there are two or more employees
For companies who have several employees, and where entertainment has been provided to all employee's that has been provided purely for business reasons, i.e. to improve morale or reward them for their hard work, and if the purpose of this meal was wholly for business reasons then the Input VAT is reclaimable but the expense is not allowable for tax purposes.
Where the director of a company incurs entertainment expenses, neither, the Input VAT or the expense may be reclaimed because the expense is considered entertainment, not a business expense.
Any entertainment that had been provided to an employee (not open to all employees) that is above £50 in value in any one tax year is required to be declared as a benefit in kind on the employees P11 and class 1a NICs will be charged.
Entertainment that is not entertainment for tax and VAT purposes
Office parties are an allowable expense providing that the social function is 'open' for all employees to attend. Where the Director is the only employee, no claim may be made.
A total of up to £150 may be claimed for each employee and non-employee (spouse) annually. This may include the associated costs of providing the party such as transport to the venue, food and accommodation.
This £150 is not an 'allowance' it is a ceiling limit for the actual cost.
Where there is more than one party per annum, so long as the total cost per head does not exceed £150 (including all the associated costs of providing the party) then the expenses are allowable.
Example one:
Two functions were provided for all employees to attend. The first function cost £90 per person and the second cost £45 per person. Both functions may be claimed. No benefits in kind are incurred by the employee.
Example Two:
Two functions were provided for all employees to attend. The first function cost £85 per head and the second cost £75 per head.
The total cost of £160.
Only one of the function expenses may be claimed. Either one of them may be claimed, but it would be more beneficial to claim the first one which incurred the greater expense.
If a function is provided and the cost is over £150 per head then the employee would be charged tax and Class 1aNICS on the whole amount.
From a VAT and corporation tax perspective, the total amount, even over £150 may be claimed because the function is not classed as entertainment.
The £150 ceiling limit relates to whether a charge of tax and Class 1 A NICS will be applied under the benefits in kind rules.