Tax rules can be confusing when dealing with business entertaining expenses. Below are examples of the three main types of business entertainment and their tax implications.
The three types are client entertaining, staff entertaining and subsistence.
|Example||Reclaim VAT||Offset Corp Tax||Avoid Income Tax&NICs||Type|
|Meal with client||No||No||Yes||Client entertainment|
|Drinks for employees||Yes||No||No||Staff entertainment|
|Hotel for employee||Yes||Yes||Yes||Subsistence|
There are different types of tax involved. We will look at the implications of these in turn.
- Value added tax
- Corporation tax
- Income tax and National insurance contributions
1. Value added tax
Reclaiming VAT on Business Entertainment
You cannot reclaim VAT on business entertainment. Business entertainment is defined as any form of free or subsidised entertainment or hospitality to non-employees.
You can reclaim VAT on employee expenses and entertainment expenses if those expenses relate to travel and subsistence or where you entertain only employees.
VAT: Examples of non-tax allowable business entertainment
i.e. business entertainment for non-employees:
- food and drink
- accommodation – e.g. hotels
- theatre and concert tickets
- sporting events and facilities
- entry to clubs and nightclubs
- use of capital assets such as yachts and aircraft
- payments made to third party business entertainment organisers
- free samples
- business gifts
- when you provide entertainment or hospitality only for the directors or partners of your business
2. Corporation Tax
An expense is tax allowable for corporation tax purposes if it is wholly and exclusively used for business purposes. An exception to this rule is business entertainment.
Business entertainment is not allowable for corporation tax purposes. There are of course a couple of exceptions to the rule.
Corporation Tax: Examples of tax allowable business entertainment
- Staff entertainment
- Sponsorship if wholly and exclusively for the business
3. Income Tax and National Insurance Contributions
Income tax and employee NICs (Class 1) are a tax on the employee whereas employers NICs (Class 1a) are a tax on the employer.
The basic rule is that if you provide an employee with anything other than pay it may count as an expense or benefit.
Expenses that are wholly, exclusively and necessarily incurred in the performance of duties are not subject to income tax and NICs. For example staying in a hotel on a business trip (subsistence) does not attract these taxes.
When an employee receives a benefit in kind they may be liable to tax on that benefit. Entertainment is a benefit in kind and has the following implications.
|Example||Income Tax Due||Class 1 NICs Due|
|Employer entertains a client||No||No|
|Employer entertains an employee||Yes||Yes|
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