Entertainment Expenses – what is tax deductible?
It is common at this time of the year to see a lot more gifting and partying. It is after all the festive season.
The costs of parties and gifts can be a tax allowable expense and any VAT can be claimed back if it relates to employees.
You can of course entertain your customers and contacts, but you will not be able offset the expense against your income or corporation tax or claim back any VAT.
HMRC are quite strict about who is an employee. Employee means those that are currently employed by you and does not include sub-contractors as they would not be on your payroll.
You can use the HM Revenue & Customs (HMRC) annual exemption for staff parties for example. This is an exemption of up to £150 (including VAT) available per head that businesses can utilise for entertaining their employees
This could include providing entertainment and refreshments (including alcohol) for your teams to enjoy. The expenses will be tax allowable against profits and the employee will not have to pay any tax either, plus, you can claim back any VAT.
Please note that the exemption is not just limited to Christmas so it can still apply if you decide to postpone your party. However, it runs per each tax year, i.e. 6th April to following 5th April so the current years exemption will expire if you do not utilise it by 5th April 2022.
How Does The £150 Limit Work?
The £150 applies per attendee for a single event, or over multiple events. It can include accommodation, transport, entertainment, and food/drinks. It can include partner or family members of the employee. However, the following must apply:
- It must be open and available to all employees (you could however have different events for different employees).
- The purpose of the event must be to entertain staff.
- It must not exceed £150 per head, otherwise the whole amount becomes taxable; it is a limit not an allowance.
- You can have multiple events that make up the allowance e.g. Summer Picnic and Christmas Party.
- The cost per head of each event is calculated simply as the total cost divided by number of attendees.
Remember, the limit is per head attending, not per employee so you could invite a plus one with all your employees.
This allowance was introduced by HMRC from 6th April 2017 but in our opinion, it is still not used extensively by businesses, either because they are not fully aware of it or because they have a general awareness, but do not know how to apply it in practice.
Either way, it is a very useful gift from the taxman which should no longer be ignored.
It can include gift cards (not convertible to cash), bottles of wine/spirits, hampers or any other festive gifts you can think of not costing more than £50 (including VAT) per gift.
However, you cannot give away cash.
So, What Are the Rules for Trivial Benefits?
The rules are there to ensure that the gift is a genuine gift, there should be an element of surprise attached to it as with most great gifts. So, what do we mean by element of surprise?
- The gift cannot be a reward for service (as this may carry some expectation set out in the staff manuals) although there is an altogether separate exemption available for long term service reward which does not form part of Trivial Benefits rules
- It cannot be contractual
- It cannot form part of the salary sacrifice scheme (which is contractual) that you may be operating
- It cannot be habitual and therefore again creating an expectation, i.e. every Christmas.
- It cannot be a reward for doing the job
- It cannot be a reward for achieving targets
- Close company director/shareholders have a limit of £300 a year (close company is where there is 5 or fewer shareholders)
The rules for trivial benefit will not apply if you are using it consistently each year.
So mix and match! One year you can give a gift to all the staff to say “thank-you” but the next year take them out for an afternoon at the pub, just need to make sure the amount you spend is no more than £50 per person.
What is business entertainment?
Business entertainment is when you provide any kind of hospitality to your business clients and contacts. It could be food and drink, tickets, entertainment and sporting events.
If your business has only directors the rules are different. HMRC states that they do not consider the costs of entertainment for director only companies as genuine staff entertainment. But there are two exemptions:
- Trivial benefits rule can apply to director only companies
- When travelling away from home on a business trip, meals etc. are allowed for tax and VAT purposes.
When you say thank you to your team it is motivating and provides encouragement. Taking the team out during an evening is just a wonderful way for you to show you care.
Call your director at Myers Clark to help you further if you want to show appreciation to your team.
If you are not yet working with us yet, please contact Priya at email@example.com