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Entertaining staff and clients is one of the fun parts of business. Sharing each other's company in an environment away from the office, which often involves food & drink, can help with building work relationships with both clients and employees. But can you claim any tax relief on the money paid to entertain?
HMRC state that ‘staff entertaining is allowable so long as it is wholly and exclusively for the purposes of the trade'. That means expenses associated with the entertaining of staff including food & drink, accommodation, travel and entertainment are allowed as long as they meet the following requirements.
For example, if you have a Christmas party and you are entertaining 10 employees then £1500 is the maximum can be spent on the entertainment; anything over this and the entire cost will be taxable.
There will be times when you will need to entertain a potential customer to help build a relationship and increase the possibility of doing business. Can you can reclaim the costs? The entertaining of clients, customers and other non-staff business contacts is, unfortunately, not tax deductible. HMRC employ complex rules which determine the allowance of entertainment costs in regards to tax; you need to prove that there is a direct benefit to your business in order to reclaim the expenses.
HMRC considers entertainment expenses as those you incur when providing free or subsidised hospitality to staff or clients. Entertaining costs include, but are not limited to, food and drink, event tickets (sports, theatre, concert etc.) and activities (karting, team building, escape rooms etc.).
If the sole purpose of expenditure is to make profit for your business, then HMRC will class costs as allowable and you will be allowed to claim them back in your annual accounts. However, there are certain rules regarding what businesses are allowed to claim back and HMRC state some specific entertainment expenses are non-allowable; you can’t claim them back. These non-allowable expenses include the entertaining of clients and suppliers.
If you are entertaining staff, then HMRC class it as as "staff entertainment", which is allowable. You may also be able to reclaim any VAT you pay on entertaining staff. This rule only applies if you are entertaining your employees; if clients are being entertained then you will not be able to reclaim any of the VAT. If you are entertaining both clients and staff, then you can only claim back the VAT that is spent entertaining your employees and not the VAT that is spent entertaining clients.
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