< Go Back Can we deduct entertaining expenses? Posted: Nov 8, 2019 The
tax rules on the deductibility of entertaining expenses are harsh and often
misunderstood - the fact that the expenditure is incurred for businesses
purposes does not make it deductible. Subject to certain limited exceptions, no
deduction is allowed for business entertaining and gifts in calculating taxable
profits.
What counts as
business entertainment?
Business
entertainment is the provision of free or subsidised hospitality or
entertainment. Hospitality includes the provision of food drink or similar
benefits for which no payment is made by the recipient. It also extends to
subsidised hospitality whereby the charge made to the recipient does not cover
the costs of providing the entertainment or hospitality.
Examples
of business entertaining would include taking a supplier to lunch, taking
customers to a day at the races, or inviting them to a box at rugby match, and
suchlike. The definition is wide.
Exception 1: Entertaining
employees
One
of the main exceptions to the general rule that entertaining expenses cannot be
deducted is in relation to staff entertainment. A deduction is allowed for the
cost of entertaining staff, as long as the costs are incurred wholly and
exclusively for the purposes of the trade and the entertaining of the staff is
not merely incidental to the entertaining of customers. So, for example, a
company would be able to deduct the cost of the staff Christmas party in
calculating its taxable profits. However, if a company takes customers to
Wimbledon, the fact that a number of employees also attended is not enough to
guarantee a deduction as the entertaining provided for the employees is
incidental to that for customers.
It
should be noted that unless an exemption is in point, employees may suffer a
benefit in kind tax charge on any entertainment provided.
Exception 2:
Normal course of trade
The
disallowance does not apply where the business is that of providing
hospitality, and as such a deduction is allowed for the costs incurred in
providing that hospitality as long as they are incurred wholly and exclusively
for the purposes of the business. Businesses such as restaurants and events
management companies would fall into this category.
Exception 3: Contractual
obligation to provide entertainment
Where
entertainment is provided under a contractual obligation, this is not treated
as business entertainment and a deduction is allowed for the cost. A common
example would be where hospitality is provided as part of a package. However,
the business should be able to demonstrate that they have received a full
return for the entertainment provided.
Exception 4: Small
gifts carrying an advert
The
provision of business gifts is treated as business entertaining with the result
that a deduction for the costs is not generally allowed. However, there is an exception
for gifts costing not more than £50 per year per recipient which bear a
conspicuous advert for the business. An example of a deductible gift would be a
diary or a water bottle featuring an advert for the business.
Remember:
Just
because entertaining is incurred for business purposes does not mean that it is
allowable - business entertaining needs to be added back in the corporation tax
computation.
Partner note: CTA 2009, ss.
1298 , 1300.