A guide to business entertainment expenses

“Let me pick up the bill” – the words often used by business owners when paying for client entertainment to celebrate a project milestone or a reward for hard working colleagues.

There's no doubt that entertaining colleagues or clients is a core part of doing business and can be one part of the ‘glue' that improves relationships across your business.

However, as with all things expense-related, it's vital to understand what ranks as a legitimate entertainment expense. It's also important to know in what circumstances you can claim tax relief and VAT on entertainment expenses, to make sure that your reporting is fully compliant.

What is a business entertainment expense?

HMRC advise that business entertainment can include eating, drinking and other hospitality, for example tickets to an event or accommodation.

According to HMRC, types of entertainment can include:

• 'business entertainment' of clients, for example, discussing a particular business project or forming or maintaining a business connection.
  

• ‘non-business entertainment' of clients, for example entertaining a business acquaintance for social reasons.
  

Exactly what business entertainment you need to report, and how it will be treated for tax purposes depends on the type of entertainment, who arranges it, and who attends. Staff entertainment also has its own rules that need to be considered.

Business entertainment of clients

Client or business entertainment relates to the expense you incur when you host existing clients, possible future clients, or anyone outside the business, such as a customer, and the company generally cannot reclaim input VAT on those costs.

In order for it to count as client entertainment, it must be provided for free.

It makes sense to pay for taking clients out by paying through the business account rather than personal accounts. For mixed events involving employees and clients, you may need to apportion the costs and only reclaim the employee element, ensuring you understand which client entertainment expenses you are allowed to claim.

Expend's Employee Card enables you to empower your employees with a pre-loaded expense management card, enabling them to cover entertainment expenses. It operates on the Visa platform and can be used at all outlets where Visa is accepted.

HMRC expects detailed records, so use a clear method to categorise entertainment expenses in the accounts.

As importantly, colleagues are saved the chore of using their own money, saving the receipt, and making a claim later.

What staff entertainment costs are acceptable as business expenses?

For HMRC purposes, in order to qualify, staff entertainment costs need to relate to people on your payroll, and do not include previous employees, interviewees, subcontractors or shareholders who don't actually work in the business.

Staff entertaining is generally regarded as an allowable business expense and is tax deductible. Allowable costs would include food, drink, entertainment, venue hire, transport, and overnight accommodation. VAT-registered businesses can also recover VAT incurred on allowable staff entertaining expenditure.

Employee entertainment can become a benefit in kind, and to avoid unnecessary reporting, HMRC provides an Annual Party Exemption. So, for a yearly party or social function, including Christmas party expenses and other staff events that may be tax deductible, allowable employee entertainment costs include food, drink, and venue hire, and expenditure of up to £150 per head is allowable and is exempt from income tax charges and employer's National Insurance.

It's worth noting that if the total cost is more than £150 per head, none of the expenditure can be covered by the Annual Party exemption. However, for ease, several separate events can be rolled up within the exemption, provided that the total cost per employee is not more than £150 per tax year, and businesses should use the exemption correctly to avoid a benefit-in-kind issue. If both staff and non-staff attend, the business can get or reclaim VAT only on the employee share of the costs.

Disclaimer: This is not legal, accounting, or tax advice - it's simply a guide. If you need help, check with your accountant or contact HMRC directly.