Business Entertainment Expenses - The Ultimate Guide from ExpenseOnDemand

Business Entertainment Expenses from ExpenseOnDemand

Last updated: 3rd July 2023

In a nutshell business entertainment expenses can be defined as "hospitality of any kind" and commonly includes but not limited to:

• food and drink

• overnight accommodation

• theatre and concert tickets

• entry to sporting events / facilities

• entry to clubs / night clubs

• use of business assets such as aircraft or yachts

• when you provide entertainment for the directors or partners of your business

In this ultimate guide we will help you gain a comprehensive understanding of business entertainment expenses and answer the most common questions we hear.

What counts as business entertainment expenses?

Entertainment is an enjoyable and often necessary part of running a successful business.

However, it can also be expensive so it it really important to keep track of all your business entertainment expenses.

Business entertainment benefits for your business:

• Building relationships with clients and customers. Taking clients out to lunch or dinner can help you build rapport and trust. This can lead to more business opportunities in the future.

• Retaining employees. Throwing an end-of-year party or other employee appreciation events can show your staff that you value their hard work. This can help you retain top talent.

• Boosting morale. A fun and engaging company culture can help boost employee morale and productivity. Entertainment can be a great way to create a more positive work environment.

Can you claim entertainment as a business expense?

One of the questions we hear most often is "can you claim entertainment as a business expense?"

The answer depends on the type of entertainment and who it is for.

• Client entertainment is not tax deductible, but you can make it more tax efficient by paying for it through a business account.

• Staff entertainment is tax deductible if it is an annual event that is open to all employees and costs less than £150 per person.

What Counts as Business Entertainment Expenses?

Business entertainment expenses are costs incurred by a business to provide hospitality to people who are not employees of the business, with the intention of promoting or maintaining business relationships.

However, not all entertainment expenses are treated equally from a tax perspective.

HMRC has a set of rules for determining whether an expense qualifies as a business entertainment expense. These rules are complex and can vary depending on the type of entertainment, who organises it, and who attends it.

In general, an expense will qualify as a business entertainment expense if it meets the following criteria:

• It involves the provision of hospitality. This can include food, drink, accommodation, or tickets to an event.

• It is incurred for the purpose of promoting or maintaining business relationships. This means that the entertainment must be directly related to the business of the company and must be likely to produce a benefit for the company.

• It is reasonable and not lavish or extravagant. The cost of the entertainment must be proportionate to the business benefit that is expected to be achieved.

• It is documented. The company must keep accurate records of all business entertainment expenses, including the names of the people entertained, the date and location of the entertainment, and the cost of the entertainment.

If an expense meets all of these criteria, it will be considered a business entertainment expense and will be tax-deductible. However, there are a few exceptions to this rule.

For example, entertainment expenses incurred at a business-related convention or trade show are fully deductible, regardless of the cost.

Client Entertainment vs. Staff Entertainment

The rules for business entertainment expenses are different for client entertainment and staff entertainment. Client entertainment is any entertainment that is provided to a non-employee for the purpose of promoting or maintaining business relationships.

Staff entertainment is any entertainment that is provided to an employee for the purpose of promoting or maintaining morale or productivity.

The rules for client entertainment are more restrictive than the rules for staff entertainment. For example, client entertainment is not tax-deductible unless it is incurred at a business-related convention or trade show. Staff entertainment, on the other hand, is generally tax-deductible, regardless of where it is incurred.

Client Entertainment Definition & Rules

Business entertainment is defined by HMRC as any hospitality that is provided free of charge to people who are not current employees of your business.

Client entertainment can be broken down into two categories:

• Business entertainment of clients. This type of entertainment is provided to clients while discussing a business project or maintaining a client relationship. It is tax-deductible if it is reasonable and proportionate to the business benefit that is expected to be achieved.

• Non-business entertainment of clients. This type of entertainment is provided to clients for social reasons, such as a birthday party or a holiday celebration. It is not tax-deductible.

It is important to note that the rules around client entertainment can be complex.

Client entertainment rules:

• The entertainment must be provided free of charge. If you charge your clients for the entertainment, it will not qualify as business entertainment.

• The entertainment must be provided to a client. If you provide entertainment to a business acquaintance or friend, it will not qualify as business entertainment.

• The entertainment must be reasonable and proportionate. The cost of the entertainment must be proportionate to the business benefit that is expected to be achieved.

• You must keep accurate records of all business entertainment expenses. These records should include the names of the people entertained, the date and location of the entertainment, and the cost of the entertainment.

If you follow these rules, you can be sure that your client entertainment expenses are tax-deductible.

Is Client Entertainment Tax Deductible?

In general, no, client entertainment is not tax-deductible in the UK. This means that you cannot claim back the cost of entertaining clients as a business expense.

However, there are a few exceptions to this rule. For example, entertainment expenses incurred at a business-related convention or trade show are fully deductible, regardless of the amount spent.

Even though client entertainment is not tax-deductible, there are still ways to make it more tax-efficient. One important thing to remember is to always pay for client entertainment through your business account, rather than your personal account. This will ensure that you do not have to pay income tax on the expense.

Another way to make client entertainment more tax-efficient is to keep accurate records of all expenses. This includes the names of the people entertained, the date and location of the entertainment, and the cost of the entertainment. If you keep accurate records, you will be able to claim back any VAT that you paid on the expenses.

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Employee Entertainment Definition & Rules

The rules around employee entertainment are different from the rules around client entertainment. In general, employee entertainment is tax-deductible, while client entertainment is not. However, there are some restrictions on what expenses qualify as employee entertainment.

What constitutes an employee?

According to HMRC, an employee is someone who is on your company's payroll and is paid a salary.

However, this does not include past employees, subcontractors, volunteers, or shareholders who do not work within the business.

What is the difference between employee entertainment and business entertainment?

Employee entertainment is any hospitality that is provided to your employees for the purpose of promoting or maintaining morale or productivity. Business entertainment, on the other hand, is any hospitality that is provided to clients or other non-employees for the purpose of promoting or maintaining business relationships.

What expenses qualify as employee entertainment?

The following expenses qualify as employee entertainment:

• Food and drink

• Tickets to sporting events or concerts

• Admission to clubs or other places of entertainment

• Transportation and accommodations for employees

• Gifts

Which Company Entertainment Expenses Are Tax Deductible?

In the UK, company entertainment expenses are generally not tax deductible. However, there are a few exceptions.

One exception is for qualifying events. A qualifying event is an annual event that is open to all employees and costs less than £150 per guest. Examples of qualifying events include summer picnics and Christmas parties.

Another exception is for business-related entertainment. Business-related entertainment is entertainment that is provided to clients or other non-employees for the purpose of promoting or maintaining business relationships.

However, business-related entertainment is only tax deductible if it is reasonable and proportionate to the business benefit that is expected to be achieved.

Company entertainment expenses tips:

• You must keep accurate records of all company entertainment expenses. These records should include the names of the people entertained, the date and location of the entertainment, and the cost of the entertainment.

• If you are claiming tax relief for business-related entertainment, you must be able to demonstrate that the entertainment was reasonable and proportionate to the business benefit that was expected to be achieved.

• If you are entertaining clients or other non-employees, you must be able to demonstrate that the entertainment was not lavish or extravagant.

Let ExpenseOnDemand Take Care of you Business Entertainment Expenses

ExpenseOnDemand; the UK's best expense management software helps to reduce the administrative burden of business entertainment costs for both clients and employees. By setting categories for expenses, establishing spending limits, and even recording attendees at events,

‍ExpenseOnDemand can help you to keep track of your business entertainment expenses and make your life that little bit easier.