Introduction: Business entertainment is a vital tool for forging and nurturing relationships with clients and prospects. However, the tax implications surrounding this practice are often complex and misunderstood by business owners. In this blog, as Chartered Tax advisors, we’ll delve into the world of business entertainment, examining its various facets and the tax considerations that come with it. From what constitutes business entertainment to tax implications for both businesses and employees, we’ll provide valuable insights to help you make informed decisions.
What is Business Entertainment? Business entertainment, often referred to as corporate entertainment, encompasses any form of free or subsidized hospitality provided by a business to non-employees, primarily clients. This can include:
- Provision of food and drink.
- Offering accommodation, like hotel stays.
- Tickets to theater and concerts.
- Access to sporting events and facilities.
- Entry to clubs and nightclubs.
- Use of business-owned assets, such as apartments or yachts, for entertainment purposes.
In some cases, employees of the business may attend these events to act as hosts and facilitate business interactions with guests. It’s important to note that business entertainment does not cover entertainment exclusively for employees, which is categorized as staff entertainment.
Tax Implications for Businesses: While expenses related to business entertainment are considered sales and marketing costs, they are not tax-allowable business expenses. This means that these expenses cannot be deducted from your business profits when calculating your tax liability. For VAT-registered businesses, providing business entertainment incurs additional costs as the VAT paid is not recoverable.
For businesses, this translates to a scenario where, despite incurring entertainment costs that reduce reported profits, these costs must be added back when determining taxable profits. For example, if your business spends £5,000 on entertainment and shows a net profit of £10,000, your tax liability will be based on a taxable profit of £15,000, not £10,000.
Tax Implications for Employees: When business entertainment involves employees, there may be a benefit-in-kind tax implication. Whether this applies depends on the nature of their attendance and duties:
- If an employee takes a client to lunch as part of their job duties, there is no taxable benefit.
- Genuine business entertainment, involving employees and clients, typically doesn’t result in a benefit-in-kind charge.
- However, if employees and guests attend an event without a clear business connection, they may incur a benefit-in-kind tax liability for their share of the costs.
To protect employees from tax liability and employers from Class 1A National Insurance contributions on taxable benefits, clear guidelines and agreements with HMRC are essential.
Staff Entertainment: Businesses often entertain employees to motivate and foster goodwill. Expenses incurred at staff-only events are generally allowable for tax purposes, with recoverable VAT. However, employees may still incur a benefit-in-kind tax liability, and the business may face Class 1A employer’s NICs costs.
An exemption exists for annual staff functions, such as Christmas parties, up to £150 per person, provided specific criteria are met. A Pay As You Earn (PAYE) Settlement Agreement (PSA) can also be used to manage certain taxable charges resulting from employee expenses and benefits.
Read more at our Christmas Party where Christmas shouldn’t be taxing!
Business Gifts: Small gifts, valued at up to £50 per person annually, can be provided for business events or to cultivate goodwill with clients. These are tax-allowable expenses if they include an advertisement for the business but exclude food, drink, or tobacco.
For employees, gifts are usually treated as a benefit in kind. However, some trivial benefits may be exempt, such as small gifts for special occasions or seasonal gifts.
Hints and Tips: Navigating the tax implications of business entertainment can be intricate. Here are some valuable tips:
- Seek advice from an accountant or specialist tax adviser to ensure proper accounting for business and staff entertainment expenses. Feel free to contact us to discuss this further and we’ll be happy to help!
- Ensure all employees complete expense forms and provide receipts for business entertainment costs they claim.
- Remember that the actual cost of business entertainment is often higher than the quoted cost, considering potential VAT, tax, and NICs.
In conclusion, understanding the tax implications of business entertainment is crucial for both business owners and employees. By adhering to tax guidelines and seeking professional advice, you can enjoy the benefits of relationship-building through entertainment while staying compliant with tax regulations.