Tax Relief for Entertaining Clients and Staff

Entertaining staff and clients is more than just a perk for the business, it’s a great opportunity to share each other’s company in an environment outside of the typical business setting. It often involves food and drink and can strengthen work relationships, boost morale, and build trust among clients and employees. 

Beyond the fun aspects of these events, a key question remains: Can you claim any tax relief on the costs incurred from entertaining employees and clients? The short answer is yes, but there are several rules that must be strictly adhered to in order to qualify for tax relief.

Are Staff Entertainment Expenses Tax Deductible?

HMRC, (His Majesty’s Revenue & Customs), is the governing body responsible for collecting and distributing money that pays for public services in the United Kingdom. HMRC states that “staff entertaining is allowable so long as it is wholly and exclusively for the purposes of the trade.” So this means, unless there is a clear business benefit, the occasion is typically flagged as non-deductible. 

Some expenses, like entertainment tax relief, can fall into a grey area, so it’s important to understand what the cut-off is for allowable deductions. Expenses associated with entertaining staff, like food and drink, accommodation, travel, and entertainment are allowed as long as they meet the following requirements: 

• The total cost, per member of staff, must not exceed £150 (including VAT) per year. This figure is inclusive for all expenses associated such as transport and accommodation. 
• You don’t have to spend the full £150 on a singular event, for example, you could have a Christmas party and a summer BBQ at £75 per head and still qualify for the tax relief. 
• The £150 is not an allowance, but a limit; if the cost-per-head is greater than £150 (even by a penny), then the entire value is taxable, not just the initial £150. 
• The event(s) must be for entertaining staff and open to all members of staff at that location. 
• The event(s) cannot be exclusive to directors only, unless every member of staff is a director. 
• The cost of the entire event is an allowable expense for your business. 
• You can claim back input VAT, but this can be restricted when you are also entertaining clients and staff alike. 

For example, if you have a staff Christmas party and are entertaining 15 employees, then £2250 can be spent on entertainment like food, drinks, and travel. Anything over this total amount makes the entire cost of the event taxable. So you must be careful not to exceed this amount unless you’re prepared to front the entire cost as you’ll be ineligible for tax relief. 

Are Client Entertainment Expenses Tax Deductible?

Understandably, there may be times where you will need to ‘entertain’ a potential customer or client to build a relationship and increase the likelihood of business. Which begs the question, Can I claim for entertaining clients and businesses? Unfortunately, entertaining clients, customers, and other non-staff business contacts is not tax deductible.

HMRC employs complex rules and regulations which determine what is considered an entertainment cost in relation to tax; you need to prove that there is a direct benefit to your business to successfully reclaim the expenses. 

Tips To Stay Compliant with HMRC Rules

In order to stay on the safe side of tax relief, you should:

• Keep detailed records of who attended the event in question, and their role (employee, customer, supplier, etc.) 
• Detail the purpose of the event on receipts or logbooks, like “staff morale building” or “client relationship dinner”. 
• Split receipts where both staff and clients are attending the event, so that you can easily assign VAT and tax deductions correctly. 

What Do HMRC Consider an ‘Entertainment Expense’?

While events can differ among businesses, it’s important to understand what HMRC considers an entertainment expense. An entertainment expense is a cost incurred when providing free or subsidised hospitality to staff or clients. Types of entertainment include, but aren’t limited to: 

• Food and drinks at places like restaurants, bars, and catering venues
• Tickets to events like football matches are theatre performances
• Corporate hospitality events like suites and VIP areas at events
• Team building activities such as go-karting, escape rooms, paintballing
• Staff parties for occasions like Christmas, summer, or annual celebrations
• Incentive Trips like overnight stays, travel and accommodation to the incentives, coach and transfers
• Business lunches and dinners (providing they’re not working meals like regular lunch)
• Activity days like cooking classes or wine-tasting

Can You Reclaim the Cost of Entertaining Clients Against Corporation Tax?

If the sole purpose of expenditure is to make profit for your business, HMRC will consider the costs allowable and you will be able to claim it back on your annual accounts. However, there are certain rules regarding what businesses are allowed to claim back. Typically, these expenses involve entertaining clients and suppliers; you can’t claim back expenses incurred at these events. 

Common Mistakes to Avoid When Classifying Tax Deductible Events

For total clarity, we’ve come up with a list of common mistakes businesses tend to make when attempting to claim back expenses incurred for the purposes of ‘entertainment’: 

• Assuming the £150 is an ‘allowance’. Remember, even spending £150.01 per head per year makes the entire amount taxable, not just the money over the initial £150. 
• Including non-employees at ‘staff-only’ events and attempting to claim back for everyone. This invalidates the tax deduction and risks triggering a benefit-in-kind tax charge to your business.
• Forgetting to include transport or accommodation when calculating the per-head limit, unless you’re paying for this out of your own pocket.