As we find ourselves coming out of the other side of the Pandemic, and with the glimmer of hope that business and social work events are soon to be back on the agenda, I thought that now would be a good time to remind you of the tax implications of entertaining.
Broadly speaking, we can categorise entertaining between business entertaining, and staff entertaining. The tax implications of each are remarkably different.
The general rule is that if an expense is wholly and exclusively for the purpose of the business, then it is allowable for both tax and VAT. There is however a specific tax block on entertaining expenses. Let’s, therefore, have a look at each scenario in turn.
Staff entertaining is allowable for corporation tax, so long as it meets the definition of wholly and exclusively for the business and is not incidental to entertainment which is actually for customers (more on this later). Therefore, an annual Christmas or Summer party, in place as a thank you or a morale boost to employees, should be perfectly acceptable.
An employee is generally speaking a person that is on the payroll. However, for the purpose of staff entertaining when considering the allowable deduction for corporation tax, this actually also extends to retired employees and partners of both current and ex-employees.
For the entertainment to be a tax-free benefit for the employees themselves, the following conditions must all be met:
VAT can be recovered in full on any staff entertaining which is wholly and exclusively for the trade, however, this is only on the cost of entertaining current employees.
Business entertainment is not tax deductible and nor is the input VAT recoverable. Business entertaining is defined as any hospitality given to a customer, potential customer or any other person not employed by the business.
Where there is entertaining which is for the benefit of both employees and customers, to decide whether the staff element is allowable (remembering the cost of entertaining the customer or anyone outside of the payroll will not be allowable), you need to determine whether the staff element is incidental to the customer entertainment. If it is, then the total cost will not be allowable. If, however, the business would have paid for the staff expense, even if no other outside guests were there, this is normally completely allowable. Each situation that may occur will be different so I would always recommend talking to your accountant when situations like this arise as it may not be a clear-cut answer.
By Robyn Jennings, Director