27th July 2018

Business entertainment tax rules: the mistakes to avoid

Are you making mistakes when it comes to applying business entertainment tax rules?

As you (probably) know, both income and corporation tax 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. Corresponding business entertainment tax rules for directors and employees mirror the block, but to prevent double taxation both sets of rules don’t apply to the same expense.

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.

Business entertainment tax rules

Always claim reimbursement of entertainment expenses you incur from your company. Photo by rawpixel on Unsplash

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

Mistake 1 – Owner managers of companies, especially those strapped for cash, can fall into a trap involving reimbursement of entertainment costs, e.g. to help their company’s cash flow a director pays for entertaining 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 to cost them in the end. However, the side effect of not claiming the reimbursement is that both they and their company fail to receive tax relief under the terms of special rule already mentioned.

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 form obtaining tax relief for the expense provided that the company doesn’t claim a deduction for it.

Mistake 2 – Another common mistake made regarding business entertainment involves associated travel costs, e.g. 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.

If the business pays for the customer’s travel to a business entertainment event, the special business entertainment tax rules apply to block tax relief. However, the cost of your (or an employee’s) travel to the same event is tax deductible.

Still have questions about business entertainment tax rules? Give us a call and we can advise you.

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