Taking advantage of exemptions for entertainment

Deductible expenses

Amongst other things, the tax rules aim to prevent business owners from obtaining tax relief for expenses which have a private purpose or result in a personal benefit for themselves or their employees. To qualify for tax relief an expense must be “wholly and exclusively for the purpose of the trade”. But even if this test is passed there are specific rules which exclude tax relief for some types of expense. Business entertainment costs is one of these, but there are exceptions.

Tax-deductible entertainment

Employers are entitled to a tax deduction for the cost of entertaining their employees. This isn’t largesse on the part of HMRC but a necessary relaxation of the rules to prevent double taxation. This would result because not only would there be no tax deduction for the employer but the employees are taxable on the value of being entertained as a benefit in kind. Entertainment costs relating to company director shareholders also qualify for a tax deduction because for tax purposes they count as employees. This doesn’t apply to owners of unincorporated businesses. With one exception the cost of entertaining themselves isn’t a deductible expense for their business. However, it doesn’t result in benefit in kind tax as these rules don’t apply to owners of unincorporated businesses.

If an unincorporated business pays for staff entertainment, e.g. a party, which includes the owners, HMRC accepts that the cost is deductible including that relating to the business owners.

Entertainment involving employees

The rules also block tax relief for expenses which while involving an employee are not directly aimed at them, e.g. if an employee visits a customer and takes them for a meal. The whole cost of this counts as business entertainment (and so is not tax deductible), not just the element relating to the customer.

Tax efficiency

Even where a business is entitled to claim a tax deduction for the cost of, say, meals and other entertainment provided to directors and employees, it doesn’t mean it’s tax efficient for the business to provide these. Directors and employees are taxed on benefits in kind on the amount the business spends on entertainment for them. Plus, the business must pay Class 1A NI contributions at 13.8% (15.05% from 6 April 2022) of the taxable amount. This means that between the business and the employee or director there’s usually a net tax and NI cost for staff entertainment, that is unless the specific tax exemption from the benefit in kind tax rules applies.

Entertaining isn’t a taxable benefit in kind if it relates to an annual event, e.g. a regular summer BBQ, and doesn’t cost your business more than £150 per head (including guests) on average. In this case the trivial benefits or other exemption applies.