By Caroline Armstrong and Paul Tyler
BOTH income and corporation tax rules block businesses from claiming a deduction from profits for expenses they incur on entertainment, such as taking customers or suppliers out for a meal.
Where you personally pay for business entertainment e.g. taking a customer for lunch, and your company repays you, an exemption applies so that you aren't liable to income tax or NI on the reimbursement. However, under the rule I've just mentioned, your company cannot claim a deduction against its profits for the amount reimbursed.
So, if someone were to typically spend £6,000 per year entertaining customers and the employer reimburses all their expenses, they would not be out of pocket. Plus, there are no tax or NI consequences, as long as the employer doesn't claim a tax deduction for the reimbursement. It must confirm this position by ticking the appropriate box on the P11D form it submits to HMRC.
Owner managers of companies can fall into a trap involving reimbursement of entertainment costs. For example, to help his company's cash flow, a director pays for entertaining out of his own pocket and doesn't bother to claim reimbursement from his company. He can be forgiven for thinking that there's no point because, whether directly or via their company, it's going to cost in the end.
The solution is simple. Always claim reimbursement of entertainment expenses you incur from your company. If it doesn't have the cash to pay you straightaway that's OK, it can do so later.
Another common mistake made regarding business entertainment involves associated travel costs, e.g. you travel to see a customer to take them out for a meal. You'll no doubt discuss work, but it still counts as business entertainment meaning that the cost of the meal isn't tax deductible for your business. However, HMRC's view is that your travel costs to meet the customer aren't part of the entertainment and are, therefore, tax deductible.
If the business pays for the customer's travel to a business entertainment event, the special business entertainment tax rules apply to block tax relief. However, the cost of an employee's travel to the same event is tax deductible.
Turning to VAT, a specific tax block applies to entertainment expenses. So, if you took a client out for a meal after a business meeting, then no input tax can be claimed on the 'client' meal. The expense here is categorised as 'hospitality of any kind' and therefore is classed as business entertainment within the VAT regulations. The only exception would be if the client was an overseas customer and the expense related to a business meeting in which case input tax could be claimed on the meal cost.
What about your meal? It needs to be considered whether you are acting as host to the client, in which case input tax is also blocked on the cost of your lunch. However, if (as seems likely) the meal cost for you is being incurred because you are away from the office on a business related job, then input tax can be claimed because the expense is classed as subsistence rather than entertainment.
As a practical example of how the rules can get tricky, what is the situation when a company hires a 12-seater box the local football club which will be enjoyed by six employees and six non-employees? In this situation, at least 50 per cent of the input tax on the cost of the box will be blocked by the business entertaining rules for the non-employees, and it then needs to be considered what role the employees are expected to carry out on the day of the match. If their function is to make sure the guests have an enjoyable time, and place lots of future business orders with the company, then input tax on the employee expenses will also be blocked because they are acting as host to the non-staff. However if they are able to enjoy the game without any entertaining function, then input tax can be claimed on their part of the cost.
If in any doubt on these rules, you should seek advice. Contact Baldwins on 01536 514871 and ask to speak to a tax expert, who would be happy to assist.