As my business is growing and expanding, I am undertaking more staff, customer and client entertaining. How are these costs treated for tax purposes?
There is a lot of confusion between subsistence and entertaining and the distinction is important because one is an allowable expense for tax purposes and the other isn’t.
Subsistence is food and drink when you are travelling for business. What you can claim as subsistence depends on whether you are self-employed, employed or a director of a company. Subsistence is an allowable expense for tax. Entertaining is providing hospitality and entertaining for customers, potential customers and other people. This is most often food and drink but could include other forms of entertainment such as event tickets as well as accommodation, use of assets such as company helicopter, gifts and free samples.
You can include entertaining in your business accounts where it is a legitimate business expense. However you then have to discount the entertaining expenses in your tax return because it is not an allowable expense for tax as either a sole trader or limited company apart from very limited circumstances.
You are allowed entertaining of payroll staff as a taxable expense providing it is within certain limits and paid for by the company. The general idea is that you can pay for a few company events each year such as the work Christmas party, summer BBQ, staff outing etc.
However there are conditions to be met otherwise it becomes a taxable benefit to your employees and a penalty rather than a treat. You can spend up to an average of £150 per person in total on company events throughout the year. However, in order to be eligible, all the events must be open to all employees of the company. The £150 is a limit, not an allowance. This means that if you exceed £150 per person, the entire spend becomes a taxable benefit for the employees.
You can include yourself only if you are a limited company director, on the payroll and have other non-director staff. Directors with no other employees and sole traders cannot entertain themselves even at Christmas! Entertaining yourself is not allowed if you are a sole trader because you are not an employee of the business, you are the business. Entertaining anyone who isn’t an employee of the company such as customers, potential customers, suppliers and subcontractors is also not allowed for tax.
Entertaining may take the form of perks and gifts. Again the rules are strict about gifts to non-employees such as customers and are more generous around gifts to payroll employees.
For non-employees, you can send Christmas cards as a tax deductible expense. You can also send small promotional gifts of up to around £50. However, the gifts must carry a clear advertisement for the business (e.g with branding or logo) which must be on the gift itself, not just the wrapping. They can’t be alcohol, food, drink, tobacco (unless they are your business) or vouchers. Non promotional gifts and larger gifts are classed as entertaining and are not tax deductible as an expense.
If you are self-employed, you don’t have to report or pay tax on personal gifts to employees. For limited companies the rules are different. If you give your employees a gift of less than £50 e.g. a couple of bottles of wine or a box of chocolates to celebrate Christmas or the birth of a child etc, then this will not normally be taxable under the new trivial benefit rules.
The rules on subsistence and entertaining are complex and good record keeping is essential. In summary, if you are out for a meal you can only claim for yourself and any payroll employees providing all the conditions for subsistence are satisfied. You can’t ever claim for meals, coffee etc provided to non-employees even if you are discussing business. Subcontractors do not count as staff even if you are treating them in the same way. Be aware of the free lunch!
The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.