As we approach the festive season, a lot of our clients ask us whether entertaining expenses are allowable for tax purposes.
The answer to that question is ‘it depends‘.
In general, entertaining falls under two categories, namely “business entertainment” and “staff entertainment”. The tax treatment for each one is different.
Business entertainment generally refers to the cost of entertaining clients, potential clients, suppliers or any other person who is not classed as an ‘employee’ of the business. This therefore means that when calculating the profit on which corporation tax is payable, any business entertainment expenses must be added back to arrive at the taxable profit.
Staff entertainment is an allowable expense for tax purposes as long as it is wholly for business purpose rather than it being incidental to customer entertainment. E.g if an employee takes out a client for lunch, the whole of the expense would be disallowed. This is because if the client was not there, the company would not have paid for the employee’s lunch and hence the employees’ lunch is incidental to that of the client.
Generally, the definition of employees includes retired employees and partners of current and past employees. However, the employees of associated companies do not qualify.
Whilst it is appropriate to acknowledge the efforts of the employees, businesses need to ensure that any expense incurred is done in the most tax efficient way.
For further information feel free to contact our team on 0121 455 8055.