What’s the right way to treat entertainment costs for tax purposes?

 

Special tax rules block relief for business entertainment costs. However, the rules can be applied in different ways. What are the dos and don’ts?

Business entertainment

As you probably know, both income and corporation taxes 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. A corresponding rule for directors and employees mirrors the block, but to prevent double taxation both rules don’t apply to the same expense.

No double taxation

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 we’ve already mentioned, your company cannot claim a deduction against its profits for the amount reimbursed.

Example. Andy is the sales manager for Acom Ltd which typically spends £6,000 per year entertaining customers. Acom reimburses all Andy’s expenses which means he’s not out of pocket. Plus, there are no tax or NI consequences as long as Acom doesn’t claim a tax deduction for the reimbursement. It must confirm this position by ticking the appropriate box on the Form P11D it submits to HMRC for Andy.

Mistake 1 – new companies

Owner managers of companies, especially those strapped for cash, can fall into a trap involving reimbursement of entertainment costs. For example, to help their company’s cash flow a director pays for entertaining customers out of their own pocket and doesn’t bother to claim reimbursement from their company. They can be forgiven for thinking that there’s no point because, whether directly or via their company, it’s going cost them in the end. However, the side effect of not claiming reimbursement is that both they and their company fail to receive tax relief under the terms of the special rule already mentioned.

Tip. 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 it later. This won’t prevent you from obtaining tax relief for the expense provided that the company doesn’t claim a deduction for it.

Mistake 2 – travel costs

Another common mistake made regarding business entertainment involves associated travel costs. Say you (or an employee) 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.

Trap. If the business pays for the customer’s travel to a business entertainment event, the special rule applies to block tax relief. Conversely, the cost of your (or an employee’s) travel to the same event is tax deductible as long as the main purpose of the event wasn’t entertainment.

By: FL Memo