Avoid tax pitfalls when entertaining

2:20pm Tuesday 6th May 2008

Comments (0)   Have your say »

MOST businesses are involved in some sort of entertaining during their accounting year. This can include Christmas parties for employees, lunching with potential customers, existing clients and suppliers.

Many of you may be aware that entertaining potential or existing clients and suppliers is not normally allowed against business profits for tax purposes. Nor can VAT be reclaimed.

What is not widely known is that related incidental costs will also not be allowed, such as paying an event management company.

Where the entertainment costs are disallowed for tax, then so will the costs relating to the employees in attendance.

So exactly what tax savings are available for businesses in respect of entertaining ?

Providing the employee who incurred the expense for such entertaining is reimbursed the same amount by the business, they will not suffer a tax or national insurance liability. The matter will require reporting on annual forms P11D to HM Revenue & Customs.

However, it is possible to reduce this reporting requirement by applying for a dispensation.

Entertaining supplied as part of a contractual obligation will be allowed for tax purposes, for example, if you provide all-day courses or conferences with food, then you should ensure that the price charged to customers for the event is inclusive of meals and drinks.

Where entertaining includes some element of advertising, the matter may well depend upon the focus of the event and related levels of expense.

Promotional events, where the focus is on publicising the business services or products, are not in themselves entertaining. Hence the costs relating to the event itself are allowed for tax against business profits.

Where the hospitality provided is minimal then the full cost of the promotional event is allowed against business profits for tax. Irrespective of the direct tax treatment, VAT can be reclaimed on the proportion relating to advertising.

Where the main purpose of the event is to entertain staff, then it may be possible to apportion the cost against business profits and reclaim a proportion of the related VAT.

Annual parties for employees, such as the Christmas party, are normally allowed for tax as an expense against business profits. What is interesting is that, (in practice) HM Revenue & Customs define "employees" as retired members of staff and the partners of existing and past employees. And providing the total annual cost per head of the parties does not exceed £150 there will be no tax on the employees.

Business entertaining can be a complex area especially from a VAT perspective. It will always be worth consulting your accountant, especially if you are holding a large event in the near future.

• Mark is with Hunter Gee Holroyd Chartered Accountants & Business Advisors