In the world of business and tax, there is often confusion over what your limited company can pay for and the tax implications involved. As a business owner, you want to reward your employees for their hard work and show appreciation to your clients. However, it’s crucial to be aware of any tax implications for your business, your employees, and your clients.
This is a relatively complex subject, so you should consult your accountant for advice tailored to your specific situation. This guide aims to provide some basics on the subject before you splurge on entertainment.
In broad terms, it is perfectly legitimate to pay for entertainment expenses from company funds, provided they are reasonable from both a business and cost perspective. Whether the costs are deductible for corporation tax and whether you can reclaim the VAT is a different matter—read on to learn more.
What is considered an entertainment expense?
Entertainment can encompass activities such as dining, drinking, and providing other forms of hospitality. There are essentially two categories of entertainment: Employee Entertainment and Business (Client) Entertainment.
Employee Entertainment
You cannot claim tax deductions on an unlimited amount of employee entertainment expenditure, and there can be tax consequences for your employees if you are not careful.
Annual Event Exception
If the entertainment meets all the criteria below, you can claim a tax deduction for corporation tax and reclaim the VAT. Also, the company will not have to pay any National Insurance Contributions (NICs):
- The annual cost of the entertainment does not exceed £150 including VAT per employee. This cost could be for one event or split over several events, as long as the total cost for all events combined does not breach the £150 including VAT per annum limit for each employee.
- The entertainment must be open to all employees.
- The event or events must be annual.
If the conditions above are met, your employees will not incur any tax liabilities either. You will not need to report this to HMRC or include it on your employees’ P11Ds. The exemption can apply even in the case of a virtual party.
The total VAT can be claimed even if the company spends more than £150 per head per annum on the entertainment, but you cannot claim a deduction for corporation tax.
If you breach the £150 per head threshold (even by £1), you will need to include the full per head cost as a Benefit in Kind on your employees’ P11Ds, and they will have to pay tax on this.
Bear in mind that if you had two events—the first costing £120 per head and the other costing £100 per head—you could apply the exemption to either one of the events. In this case, it would be more beneficial to apply the exemption to the first costing £120. The second event you would have to report to HMRC and show on the employees’ P11Ds. Note that you cannot say, “My first event cost only £120 per head, so I can deduct £30 off the second event”—it does not work that way. This is because it is an exemption, not an allowance. If your second event had been under £30 per head, that would fall within the exemption. Again, to be clear, if, for example, you only had one event that year and the cost was above £150 including VAT per head, the exemption would not apply, resulting in negative tax consequences for you and your employee.
Be aware that if, for example, you held a Christmas party for your directors only, the exemption would not apply as the party is not open to all staff members.
What if the employee entertainment is not exempt?
As stated above, you would not be able to claim a deduction for corporation tax and would have to pay NICs, but you can still claim the VAT component of any legitimate employee entertainment expenses. You would need to report the entertainment to HMRC and enter this as a Benefit in Kind on your employees’ P11Ds.
Trivial Benefits Exemption
Important note – there is a Trivial Benefits Exemption that you may wish to take advantage of. This rule allows you to supply tax-free trivial benefits to your employees, including yourself as a director or office holder of a limited company. A trivial benefit cannot cost more than £50.00 including VAT. There are also other criteria that must be meet in order to be classified as a trivial benefit – click the link below to go to our blog page which has additional important information.
Trivial Benefit Exemption for Limited Companies
Business Entertainment
Within business entertaining, different rules apply for UK clients versus overseas clients.
Generally speaking, regarding entertainment expenses for both UK and overseas clients, it is not an income tax-deductible expense and thus will not reduce your taxable profit. This means your company will pay income tax on the money spent on client entertainment as if it had not been spent. This relates to client entertainment and gifts.
VAT is a different story. While you cannot claim the VAT back on the entertainment of UK clients, you are allowed to reclaim the VAT on overseas client entertainment expenses. The key point here is that it should be reasonable client expenditure.
The expense should be a legitimate expense for a client or potential client. The costs should be considered reasonable and proportional to your business relationship with the client.
Quick Note
It’s important to note that it is permissible to pay for reasonable and legitimate entertainment using business funds, even if the expense is not tax-deductible for corporation tax and/or VAT is not reclaimable. It may be more beneficial to pay from business funds rather than from your own personal money that you have already paid tax on.
Here are some links below providing further information
Entertainment and Corporation Tax
Disclaimer: The content on our site is for general information only and not professional advice. Always seek professional guidance before acting on any information here. While we strive for accuracy, we cannot guarantee completeness or timeliness of the content.