Such a grey area, let’s look at how entertainment expenses for your staff and clients are treated from a tax side of things. This includes the rules around having staff parties and prospect / client entertainment e.g. treating potential clients to lunch.
In the majority of circumstances, the cost of entertainment is not tax-deductible. Additionally, VAT is non-recoverable. Of course, as with everything tax-related, the rules are complicated, meaning that in certain circumstances, VAT can actually be reclaimed.
Let’s break it all down:
As a Limited Company, you can pay for annual staff parties / entertainment, with no personal tax implications, providing the per head total doesn’t go over £150. This is not limited to one event, so you could host a Summer and Christmas party, for example. These would be permitted for Corporation Tax purposes, but be careful that the total of both events does not exceed the £150 allowance. The costs could cover food, drink, hotels, travel and tickets for events.
Keep in mind that if your company is registered under the Flat Rate Scheme, then you will not be able to reclaim the VAT. If you are registered under the Standard Scheme, you will be able to reclaim to the extent of the costs applicable to your own employees, but not guests.
Discretion and common sense is advised of course, as with everything else concerning HMRC. All claimed entertainment costs must be for business purposes i.e. not for a night out with friends and family.
Entertaining clients and prospects
You can pay for the entertainment of existing clients or prospects, however this is not allowable as a deduction for the purposes of Corporation Tax. Of course, it is recommended that you still pay for such expenses through your company, as you will save the associated income tax you would pay if you were to withdraw the funds personally.
Remember, the VAT element can only be claimed if it relates to your employees, not clients or prospects. However, another important word of caution – if an employee is hosting a client, with the purpose being entertainment, no VAT can be claimed for at all.
Finally, you can pay the costs of your own entertainment through your company, however this would simply be a benefit-in-kind, which means tax-wise you’d be no better off than paying the cost personally!