Entertaining Clients and Staff

Introduction Business entertainment is a popular and often effective way to build relationships with potential and existing clients. However, the tax implications of providing hospitality (both in relation to clients and staff who attend events) are often not understood or are overlooked by business owners.

Here we outline what is meant by the term 'business entertainment' and identify some of the key issues that business owners should be aware of in order to understand the tax implications. We explain the types of entertainment that may provide a 'benefit in kind' tax liability for employees, the kind of staff entertainment that is allowable for tax purposes and the way business gifts are treated for tax.

What is business entertainment? Business or 'corporate' entertainment includes any free or subsidised entertainment or hospitality that is provided by a business to non-employees, such as clients.

The following are provided by HM Revenue & Customs (HMRC) as examples of the main types of business entertainment:

Provision of food and drink.
Provision of accommodation (for example, in a hotel).
Provision of theatre and concert tickets.
Entry to sporting events and facilities.
Entry to clubs and nightclubs.
Use of business-owned assets, such as an apartment or a yacht, for the purposes of entertainment.

In some situations, employees of the business will also be present at the event to act as hosts and to build business relationships with the guests.

Business entertainment does not include the provision of entertainment solely for employees of the business, which is viewed as staff entertainment and is discussed in more detail later.

What are the tax implications for a business? The cost of entertaining clients and business prospects is shown as an expense in a profit and loss account, typically as a sales and marketing cost. This expense reduces the amount of profit that a company, sole trader or partnership shows in its end-of-year accounts and therefore may reduce their corporation tax or income tax liability.

However, expenses relating to business entertainment are not a tax-allowable business expense and cannot be offset against business profits when calculating the amount of tax due.

Any business entertainment costs incurred and appearing as an expense in the profit and loss account must be added back to the profits when calculating the tax liability. For example, if a business incurs entertainment costs of £5,000 and shows a net profit of £10,000 in its accounts, the tax calculation will actually be based on a taxable profit of £15,000, rather than £10,000.

For VAT-registered businesses, the provision of business entertainment has an additional cost, as the VAT incurred is not recoverable.

What are the tax implications for employees? When business entertainment is provided and employees are involved, there may be a benefit in kind tax implication for the employees. This will depend on why they are at the event and what they are expected to do. For example:

An employee takes a client out for lunch to discuss a business project. There is no taxable benefit for the employee because they are carrying out their job duties.
A business has a corporate hospitality box at a football match and invites ten key clients to attend. A director and two members of the sales staff also attend to look after the guests, watch the match and share in the hospitality provided. The participation of the director and employees at the event is considered to be genuine business entertainment and not liable to a benefit in kind charge.
Five employees and three guests go to the theatre and have a meal paid for by the business. There is no clear business benefit from the event as there is no obvious business connection with the guests, and the number of staff involved is difficult to justify. The cost of the event would not be allowable as business entertainment and the staff are likely to incur a benefit in kind tax liability for their share of the cost of the event. The expenditure related to staff would, however, be allowed as staff costs for the company (like wages), but the individuals would be taxed on their share of the outlay on the event. If guests are relatives of staff, their proportion of the cost is also part of the employee's benefit in kind.

In order to protect employees from a tax liability and the employer from Class 1A National Insurance contributions (NICs) on any taxable benefits in kind, it is necessary to:

Specifically instruct employees attending corporate events about their duties and why they have been asked to attend. To avoid a benefit in kind liability, employees must attend as part of the necessary performance of their duties and any 'enjoyment' by them of the facilities is merely incidental to the occasion.
Agree in writing any grey areas with HMRC, or decide on a general policy as to what should happen on these occasions.

All employers are required to submit an annual report to HMRC with details of expense payments and benefits paid to employees. This includes entertainment-related costs incurred by employees, which have been paid for by the business.

Some expense payments and benefits paid to employees are covered by exemptions, which means that they do not have to be included in annual reports to HMRC.

Staff entertainment Employers often entertain staff as a means of motivating their employees and generating goodwill. The costs incurred at staff-only events are generally allowable as a business expense for tax purposes and VAT is also recoverable. However, employees will usually incur a benefit-in-kind tax liability and the employer will incur a Class 1A employer's NICs cost.

For example, if a group of employees are rewarded by allowing them to attend a football match using the firm's corporate hospitality box, they will incur a benefit in kind tax charge because the event does not qualify as a business entertainment event. If the cost of the occasion is £2,000 and ten employees attend, their tax liability will be based on a benefit of £200 each. The business will also incur employer's NICs on the total cost of the event.

However, there is a tax-free exemption for annual staff functions, such as a Christmas party, up to a limit of £150 per person, provided that:

The event is annual and open to all employees.
The cost of the event must include all elements, such as transport, accommodation and VAT.
If there are two or more events a year, the aggregate cost must not exceed £150, or the whole amount of one of the events becomes taxable.

A Pay As You Earn (PAYE) Settlement Agreement (PSA) is a flexible way of managing some expense and benefit payments that result in a taxable charge for employees. It is a voluntary agreement between a business and HMRC, under which the business agrees to meet the tax payable on certain identified expenses and benefits in kind that it provides to its employees.

Business gifts Small gifts may be provided to support a business event or to create goodwill with clients, up to the value of £50 per person each year. The cost of the gift is a tax-allowable expense and VAT can be recoverable as long as the gift:

Contains an advert for the business, such as a logo.
Is not food, drink or tobacco.

More expensive gifts can be provided, but these would not be a tax-allowable expense. Since the introduction of the Bribery Act 2010, many organisations have strict rules concerning the type of gifts that employees can and cannot accept, so you should ensure that any potential gift is appropriate and acceptable before giving it.

Gifts to employees are normally treated as a benefit in kind. However, there are situations where some small gifts, regarded as trivial benefits, can be provided without incurring a tax liability for the employee. For example:

A small gift, such as a bunch of flowers to mark a particular event like a wedding or the birth of a child.
A seasonal gift such as a bottle of wine or a turkey at Christmas.

Hints and tips

Advice should be sought from an accountant or other specialist tax adviser to ensure that business and staff entertainment expenses are correctly accounted for.
All employees must complete expense forms and provide copies of receipts for all business entertainment costs that they claim.
The real cost of business entertainment is usually higher than the quoted cost because the potential costs of VAT, tax and NICs must be included to reflect the full cost of the event.

Contact Ashored for help and support with your Business and Entertaining Costs.