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Entertaining and tax deductions
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HMRC have a rule that business entertaining isn’t tax deductible. This could be a casual drink with a customer, buying them lunch or a large ball intended to promote your company. HMRC do not allow you to knock off any of the cost from your taxable profits.
However, a deduction is allowed for one type of entertainment.
Any money spent on entertaining your employees is tax deductible. The law says that this applies to directors, and in practice HMRC extends this to other types of business owner, i.e. partners and sole traders, where they attend a staff function etc.
Although, there is a catch with this. Staff entertainment is seen as a taxable benefit in kind (BiK) for employees. So as you won’t want your workers faced with a tax bill on what’s supposed to be a treat, your business will have to pay this also.
As a result the benefits from the tax deductions the business will have received will usually be wiped out by paying the tax on the BiK’s.
There is a situation where the cost of staff entertainment are both tax deductible and tax free for your employees. This is when entertainment is an annual event such as a summer ball or Christmas party and as long as the cost is no more than £150 per annum per employee including VAT.
If there was a time when an event was a combination of customers and employees. Then there would be an element which can be claimed. If a cost is charged per head then you will be able to claim in relation to your employees.
XY Ltd is hosting a summer ball for customers (100) and staff (50). The cost of hiring the room- £4000; Decorations- £400 and food and drink- £40 per head. XY Ltd would be able to claim £2,000 for the food and drinks, i.e. £40 x 50 staff. The others costs can’t be specifically attributed to employees so they can’t be claimed for. As the cost per employee is within the £150 BiK exemption there’s no tax for the employees. To be able to claim as much costs for employees attending, where possible get suppliers to express their charges per head.
From 6 April 2016 employee BiKs will be tax exempt if they cost less than £50. Therefore in the above example XY Ltd would be able to claim the £40 per head, without it counting towards the £150 exemption. Leaving this free to use at a later time.