Your Step-by-Step Guide to Creating a Client Entertainment Expense Policy

It’s time for a chat about something that can cause more headaches than a Bank Holiday traffic jam: client entertainment expenses. 

We’re talking about those lunches, dinners, golf days, and the occasional "just a quick drink" with clients that somehow turns into a late-night affair. 

Yes, they are an important part of building business relationships with clients, but without a bit of structure, they can quickly turn into a financial black hole. 

So, how can your business strike the important balance between developing those crucial client connections and keeping a firm grip on the company’s wallet? 

The answer is a solid, well-thought-out client entertainment expense policy. It’s a set of key rules for navigating the world of client schmoozing, and it helps ensure that your company’s approach is consistent and compliant, avoiding any nasty surprises when the accounts team come knocking.

In this guide, we’ll walk you through the key components of an effective client entertainment expense policy, from why it’s important to how you can set up the policy, establish approval processes, train your team, and ensure compliance with audits. 

Why bother with a client entertainment expense policy? Seriously?

"But we’re a small team, we trust each other," I hear you say. "Do we really need all that paperwork?" 

Trust is brilliant, it really is. But even the best-intentioned employees can get a bit carried away when the company card's burning a hole in their pocket. 

A proper policy isn’t about mistrust; it’s about clarity, consistency, and protecting your bottom line.

Why is having a client expense policy essential?

A client entertainment expense policy provides a clear framework for what’s acceptable when it comes to spending company money on client-related activities. When left undefined, the rules can become murky, leading to inconsistent practices, overspend or potential fraud. 

1. An entertainment expense policy creates clear expectations for employees

Without a defined policy, employees may not understand what’s considered acceptable in terms of client entertainment. They might feel uncomfortable making decisions, or risk spending too much or too little. A policy outlines the dos and don’ts, ensuring all employees are working on the same basis. 

2. Maintain control over expenses with an entertainment expense policy 

Entertainment expenses can quickly add up, especially in businesses where wining and dining clients is a regular practice. 

A well-established policy ensures that expenses stay within reasonable limits and that employees are spending the company’s money responsibly. Without a policy, your business can risk exceeding budgets or miss opportunities to maximise cost-efficiency.

3. Protect your company’s reputation through an entertainment expense policy 

When employees know what’s regarded as appropriate spending, it helps to safeguard your company's reputation. Excessive or inappropriate entertainment expenses can not only be costly but can also damage the public perception of the business. A well-defined policy sets professional boundaries, reinforcing a responsible and ethical company culture.

4. An entertainment expense policy can help you meet legal and tax compliance  

There are legal considerations and tax regulations when it comes to client entertainment. A policy ensures that your business adheres to tax laws, reducing the risk of compliance issues. In the UK, the tax treatment of client entertainment can vary, so having clear guidelines is critical to ensure that both employees and the business follow the correct procedures.

Are staff entertainment costs acceptable as business expenses?

The short answer is yes, staff entertainment costs are acceptable as business expenses, but in order to qualify, for HMRC purposes, 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.

So, 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, 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.

What are the key elements to include in a client entertainment policy?

Creating a comprehensive client entertainment policy is not as daunting as it sounds. Here are the key elements you should include to ensure your policy is both practical and effective.

1. Clarify the purpose of client entertainment

Your policy should clearly outline the purpose of client entertainment. It’s important to emphasise that the aim of entertainment is to foster business relationships, with an emphasis on professional conduct.

For example: Client entertainment should be used to enhance business relationships, build rapport, and strengthen partnerships. It is not intended for personal or social purposes.

2. Confirm the spending limits for client entertainment

It’s important to establishing spending limits, to maintain control over costs. Your policy should detail specific limits for different types of activities, such as meals, drinks, travel, and entertainment. For instance, you might have a per-person or per-event budget for meals or cap the number of attendees for each event.

This could look something like: Meals with clients may be reimbursed up to £50 per person, with an upper limit of £500 per event. Any higher expenses must be pre-approved by a manager.

3. Allowable and unallowable expenses

A clear list of what is regarded as acceptable (and what isn’t) helps avoid confusion. Commonly acceptable entertainment expenses include meals, entertainment tickets, and transportation (like taxis or train fares). On the other hand, unallowable expenses might include lavish gifts, excessive alcohol, or personal services like spa treatments.

For example: Unallowable expenses include but are not limited to: personal gifts, non-business-related events, and expenses for family members or friends who are not part of the client relationship.

4. Documentation and receipts 

To help you manage proper tracking and accountability, your client entertainment expense policy should say that all client entertainment expenses require proper documentation, including receipts, a description of the activity, and the names of the clients involved. This will not only streamline internal processes but also support any audits and tax claims.

Example policy language: Employees must submit an expense report within seven days of the entertainment event, including original receipts, a brief explanation of the purpose of the meeting, and the names of clients present.

5. Determine an approval process for client entertainment

A robust approval process is essential for preventing overspending and ensuring that expenses meet your company policies. The policy should define who has the authority to approve client entertainment expenses, what the approval process looks like, and what criteria need to be met for approval.

Example: All entertainment expenses over £200 must be approved by a line manager or department head prior to booking.

6. Reimbursement process

Detail how employees can claim reimbursement for client entertainment expenses. This could include a step-by-step guide for submitting claims, the form or system to be used, and any deadlines for submission.

For example: Reimbursement requests must be submitted via the online expense portal and include a completed expense claim form. Claims submitted more than 30 days after the entertainment event will not be reimbursed.

How to set up a streamlined approval process for your client entertainment expenses

While a policy is essential, it’s also important to have a clear and efficient approval process in place. No one wants to be stuck waiting for approval for days on end. Here’s how you can streamline your client entertainment expense approval system:

1. Define clear approval hierarchies

Create a clear hierarchy for approval. Depending on the size of your business, this might be a simple system where team leaders approve expenses, or it could involve multiple tiers of management for larger amounts. For example, line managers might approve smaller amounts (e.g., up to £100), whereas more substantial amounts require senior management sign-off. 

2. Implement an easy-to-use expense management system

Of course, manual paper-based expense processes work can slow down approvals. An automated expense management system can make everything more efficient. Employees can upload receipts, managers can approve expenses with a click, and everyone can track the approval status. 

This also ensures all expenses are documented in one central location for auditing purposes.  As importantly, an automated system enables employees to use a mobile app to log their expenses on move, removing the need for paper receipts and a paper-based claims process. 

3. Set timelines for approvals

Make sure there’s a clear expectation for how long it should take to approve entertainment expenses. Employees should be aware of how quickly they can expect a decision, and managers should prioritise approvals to avoid delays in business activities.

Training your employees to follow an entertainment expense policy

Creating a policy is an important start point. To ensure it’s effective, your employees need to understand it and follow it. Here’s how you can train employees to help them understand and live up to the policy:

1. Onboarding and orientation

Make the entertainment expense policy part of your onboarding process for new employees. This ensures everyone has a clear understanding from day one. You might also want to include a summary of the key points in the employee handbook for easy reference.

2. Regular refresher training

It’s important to remind employees of the policy, periodically. Consider having a refresher training session once a year or whenever there’s an update to the policy. This will help prevent any misunderstandings and keep the policy top of mind.

3. Clear communication channels

Sometimes, employees might be unsure if an expense qualifies for reimbursement or falls within the policy. Encourage employees to ask questions and provide a contact person or department for guidance on specific entertainment expenses. This keeps everyone informed and helps prevent mistakes.

Monitoring and auditing entertainment expenses

Once the policy is in place, it’s important to monitor and audit client entertainment expenses regularly to ensure compliance and identify any potential issues. Here are some ways to stay on top of things:

1. Periodic audits

Conducting regular audits will help you stay in control of your entertainment expenses. This could be quarterly, semi-annually, or annually, depending on the volume of expenses. Audits will help you spot any outliers, ensure compliance, and identify areas for improvement.

2. Use expense reports to spot trends

By monitoring the frequency and volume of entertainment expenses, you can make sure that spending is consistent with the policy. Analysing reports will help you to detect patterns of excessive spending or potential misuse. If certain departments or individuals consistently exceed budget limits, this can prompt further investigation or an update to the policy.

3. Encouraging self-compliance

Encourage a culture of accountability among employees. Remind them that the policy is in place to help them make the right decisions. When employees know their expenses will be reviewed, they are more likely to be reflective about what they spend and claim.

Key take-away: a well-drafted client entertainment expense policy will not only help keep your business’s finances under control but also ensure that your employees are managing their expenses consistent with your company’s values and objectives. 

Read more: see our Complete Guide to Automating Your Expense Management Process

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.