Example 1: Growing relationships
Nash and Dix Ltd, landscaping
consultants, invite all of their major clients to Chelsea Flower Show every
year. They also take staff who are expected to mingle with the clients.
This is a straightforward case of
‘normal’ business entertaining. The cost is not allowed as a business expense,
but as the main purpose is to entertain clients there are no benefits-in-kind
for the employees concerned, including owner/directors.
The entertainment rules apply to incidental costs as well, so if employees claim reimbursement for travel to an event you can reimburse them, so long as you can show they were attending in a working capacity, but you need to identify those costs because they are not an allowable business expense.
You can also simplify matters by covering any incidental employee benefits through a PAYE settlement agreement.
Example 2: Up close and too personal
Siegfried, a hairdresser, and his
old school friends, Robert (funeral director) and Wilfred (mortgage broker),
fly to the Monaco Grand Prix every year. They take it in turns to put the cost
through their company as entertaining, reasoning that 20% disallowed for
corporation tax is cheaper than paying the bill personally out of taxed income.
This year it’s Siegfried’s turn.
HMRC will treat the cost as a
benefit in kind because it has no business purpose and is a reciprocal
arrangement to provide personal benefit. That would secure corporation tax
relief, but cost personal income tax, Class 1A National Insurance
contributions, interest and penalties for incorrect forms P11D. The better
treatment is usually to disallow the cost of a personal benefit as
entertaining. The cost is still disallowed but Siegfried is treated as drawing
the cost personally and taxed as if he had taken a dividend.
Incidental entertaining
Entertaining incidental to another, allowable purpose, isn’t disallowable.
Example 3: Factory tour
Brooke & McRae make artisan chutneys and jams, so they have an event to tell customers how their products are made so superior which includes a tour of the factory, tasting and demonstration in a buffet supper format. This sort of event should not be treated as entertaining since it is a demonstration.
Think outside the hospitality boxEntertaining expenditure may sometimes be incurred at sporting venues.
Example 4: What is allowable?
Dulcie’s Decor leases a suite at
the local football ground, which is available at other times for staff
meetings, promotional events, use as a showroom and training. Dulcie apportions
the suite hire between the disallowable entertainment on match days and
allowable use in the rest of the year. Catering is contracted for on an all-in
basis for the whole year, rather than on an event-by-event basis, thus
obtaining a bulk booking discount and allowing for the cost to be apportioned
between disallowable entertainment and allowable use.
Practical Tip :
Invite customers to the party. If the main purpose of an event is an annual staff party you can use the £150 per person ‘Christmas Party’ exemption. The whole cost should be allowed apart from extra cost of the customers who come as well. At worst you will have to split the cost between staff and customers but still most of the cost of the event will be allowable.
