What are entertainment expenses?
Entertainment expenses are hospitality costs such as meals, drinks and events, and HMRC treats entertaining clients very differently from entertaining staff.
What entertainment expenses means
For tax, entertainment splits into two groups.
- Client and customer entertaining: meals, drinks, tickets and hospitality for people outside the business. These are not deductible for Corporation Tax or income tax, and VAT on UK business entertainment cannot be reclaimed, although there is an exception for overseas customers.
- Staff entertainment: events for employees, such as a Christmas party. These are normally deductible, and the VAT can usually be reclaimed.
For employees, the annual function exemption means a yearly event costs them nothing in tax if it is open to all staff and the total cost of all such events in the year is £150 or less per head, including VAT, food, drink, transport and accommodation. If the cost goes over £150, the whole amount becomes a taxable benefit in kind, not just the excess.
Example
| Event | Cost | Tax treatment |
|---|---|---|
| Christmas party for 8 staff | £1,080 including VAT (£135 a head) | Deductible, VAT reclaimable, no tax for staff |
| Dinner with a prospective client | £240 including VAT | Not deductible, VAT not reclaimable |
Had the party cost £160 a head, each employee would have had a taxable benefit of £160, usually settled by the company through a PAYE Settlement Agreement.
Common grey areas
- Staff attending a client event: the client entertaining part is disallowed, but the staff part may be allowable.
- Subsistence on a business trip with a client: your own reasonable meal can be allowable, but the client's is not.
- Hospitality given as part of a contract, such as refreshments at a training course you sell, can be a trading cost rather than entertaining.
Why it matters for your business
Recording client and staff entertaining in separate accounts in your bookkeeping makes the year-end tax adjustment simple and avoids reclaiming VAT you are not entitled to. Gifts to clients follow their own rules: items costing up to £50 per person per year that carry your business name can be deductible, but food, drink and vouchers cannot. Cloudkeepers sets up these categories in Xero and QuickBooks for clients.
Entertainment vs subsistence
Your own meal while travelling for business is subsistence, which is allowable. Paying for someone else's meal is entertainment.
Common questions
No. Client entertaining is specifically disallowed for Corporation Tax and income tax, and you cannot reclaim the VAT on it. You can still pay for it through the business, but it is added back when working out taxable profit.
The exemption is for annual events open to all employees, and directors are employees. HMRC accepts that a company whose only employees are its directors can use it, but the event must be a genuine staff function and the £150 per head limit still applies.