Is Client Entertainment Tax Deductible: Why Does It Matter?

Client entertainment can be tax deductible, but only in limited cases: businesses can usually claim it when it meets HMRC rules, such as being provided free to non-employees and staying reasonable rather than extravagant. For finance teams, accountants and business professionals who handle expenses, that distinction matters if you want to support client relationships without creating compliance issues or losing valid tax relief.

Client entertainment is often referred to as the 'glue' that strengthens business connections. It enables professionals to interact socially and develop their business relationships in a relaxed setting. This guide explains what counts as client entertainment, which activities may qualify, how the tax treatment differs from staff entertainment, what records HMRC expects you to keep, and how tools such as Expend's Employee Card can help you manage these costs efficiently.

What activities fall under business entertainment?

Client or business entertainment relates to expenditure hosting existing clients, potential clients or individuals who are not your employees.

According to Her Majesty’s Revenue and Customs (HMRC) client entertainment may involve dining, wining and other forms of hospitality.

Examples of entertainment include:

'business entertainment' with clients – such as discussions on business projects or establishing/maintaining a business relationship

and

'non-business entertainment' with clients – like socialising with a business acquaintance for personal reasons.

HMRC guidelines say that an activity qualifies as business entertainment when it meets the following three criteria:

• Entertainment is provided

• It's provided to people who are not employees of your business

• It's provided free.

Business entertainment, as defined by HMRC, encompasses a broad range of activities aimed at clients. This includes offering items, like food and drink, accommodation, tickets to events or shows, access to sports venues, clubs and even the use of assets like aircraft or yachts for entertainment purposes.

It's crucial to differentiate between client entertainment and staff entertaining, since client entertaining is generally not an allowable deduction for corporation tax and must be added back for corporation tax purposes, while staff entertaining can qualify in some cases.

A recurring annual event such as an annual Christmas party can be tax deductible when it is open to employees and stays within the £150 per head limit in a tax year, with events under that threshold exempt from tax and the whole amount taxable if it is exceeded.

For this exemption, directors count as employees, but previous employees do not.

The reporting requirements and tax treatment of business entertainment depend on factors such as the type of entertainment provided, who organises it, and who participates, and for VAT registered businesses the vat deduction position also matters: input VAT on client entertaining is, in most cases, not recoverable, while businesses may reclaim VAT and recover VAT incurred on vat paid for allowable staff entertaining where the spend is for business purposes.

Entertaining overseas customers may allow VAT recovery in specific cases if the hospitality provided is properly documented.

HMRC guidelines state that the rules governing client entertainment apply regardless of whether you arrange and pay for the entertainment, reimburse your employees expenses for arranging it, or pay a supplier for arranging it through your employee. 

Importantly, for an activity to qualify as client entertainment eligible for tax relief, it must be offered free of charge, to your clients.

Keeping records of client entertainment is crucial, for management in any business. Documenting the date, type of entertainment, attendees and business purpose is essential for record keeping.

If an event is mainly promotional, it may be treated as advertising instead of business entertaining, which can be more tax efficient.

Where employees and clients attend together, the total cost and other costs incurred should be apportioned between the staff and client elements before claiming any allowable business expense or VAT relief.

Understanding the nuances of client entertainment expenses is vital for businesses looking to maintain compliance while building strong client relationships," says Ilda Cairns, Vice President at VCA Claims Management Software. "By carefully tracking and categorising these expenses, companies can maximise their tax relief benefits while ensuring transparency and accountability. Proper management of client entertainment not only strengthens business ties but also helps safeguard your company's financial health."

Remember that only reasonable client entertainment expenses are eligible for tax relief; extravagant spending may not be deductible. 

Disclaimer: This is not legal, accounting, or tax advice - it's simply a guide. Get professional advice on complex cases involving a sole trader, partners, a business trip, overnight accommodation, Income Tax, National Insurance, taxable benefit, or benefit in kind issues. If you need help, check with your accountant or contact HMRC directly.