Now that things are opening up again, the opportunity for business entertainment is back. In an effort to get prepared for just that, we’ll be talking about business entertainment expenses, some common examples, and how to process them for tax purposes. 

Specifically, we’ll be answering these questions:

  • What counts as business entertainment?
  • What are some examples of business entertainment expenses?
  • Is business entertainment a business expense?
  • How do I process business entertainment expenses?
  • What is employee entertainment?

It’s definitely worth mentioning up top that business entertainment is not usually classed as a business expense in the normal sense. If you need more information on business expenses in general, check out our article on business expenses. 

What counts as business entertainment?

Not every kind of entertainment you provide as a business counts as business entertainment. In fact, there are some pretty strict rules on what qualifies. According to HMRC, entertainment falls into 2 categories:

  • Business entertainment of clients – where you talk about business projects, or you’re forming/maintaining a business connection. 
  • Non-business entertainment of clients – where you’re entertaining a business acquaintance for purely social reasons. 

Both kinds of entertainment can include eating, drinking, and hospitality (like hotel rooms).

Of course, for this article, we’ll be talking about business entertainment. So, remember, if you’re meeting an important client for a drink, and nothing else, it doesn’t count as business entertainment. 

What are some examples of business entertainment expenses?

Once again, there are some detailed descriptions of what counts as business entertainment. According to HMRC, entertainment is only ‘business entertainment’ if:

  • It’s provided for free.
  • Entertainment is provided (look at the examples below). 
  • It’s provided for non-employees. 

The common examples of business entertainment mentioned by HMRC are:

  • Food and drink.
  • Accommodation (e.g. hotels).
  • Theatre and concert tickets.
  • Entry to sporting events and facilities.
  • Entry to clubs and nightclubs.
  • Use of capital assets such as yachts and aircraft.

Even if you’re offering hospitality for a travelling client or business associate in a situation where it’s expected, as long as it’s for non-employees, then it counts as business entertainment.

Is business entertainment a business expense?

The short answer is no. Business entertainment is not classed as a business expense, so it’s not tax deductible in the same way that most business expenses are.

HMRC uses the ‘wholly and exclusively’ rule to determine business expenses. This means that costs can only be claimed as a business expense if they’re wholly and exclusively for business reasons, and they don’t provide any other personal benefit.

Even if you provide business entertainment because it’s polite, expected, or would improve your working relationship, this won’t count. You can’t claim it as a business expense because it’s not seen as essential for business purposes. 

Although, you can recover VAT on business entertainment costs spent on overseas customers. 

Overseas customers

This applies to any customer that doesn’t normally live, or do business, in the UK.  

It only counts if the hospitality you provide is ‘reasonable in scale and character’, and there is no personal benefit to the entertainment. 

This can get a little confusing because most entertainment will include some personal benefit for the provider. But, generally speaking, you can recover VAT charges if the entertainment is for strict business purposes. 

For example, if your overseas client needs somewhere to stay, you might be able to claim back the VAT charges on their hotel room. 

How do I process business entertainment expenses?

Even though most business entertainment won’t allow you any kind of tax relief, it still needs to be recorded with HMRC. 

You need to record the expense on a P11D form, which is the standard form used to record any expenses by your employees. 

The rules apply if you have:

  • Arranged and paid for entertainment directly.
  • Paid a supplier for entertainment arranged by an employee.
  • Reimbursed an employee when they pay for entertainment costs. 

Some business entertainment expenses are covered by ‘exemptions’, so they don’t have to be recorded. 

Exemptions

Normally, benefits and entertainment paid for by an employee have to be recorded so the employer can pay tax and national insurance on them. Some benefits can even count toward the employee’s income, meaning they could have to pay tax on the benefits themselves. 

An exemption means you don’t have to record it to HMRC, so no tax or national insurance charges will apply,

For a business entertainment expense to count as an exemption, you have to be either:

  • paying a flat rate to your employee as part of their earnings.
  • paying back the employee’s actual costs.

Check out the HMRC website for more information on exemptions

What is employee entertainment?

A lot of the time ‘employee entertainment’ is confused with ‘business entertainment, so it’s worth talking about the differences between the two. 

The main difference is that ‘employee entertainment’, as the name suggests, is entertainment provided to anybody employed by your business. According to HMRC, a person only counts as an employee if they are on your payroll, and they’re being paid a salary. So someone like a shareholder or a subcontractor will not count. 

Is employee entertainment a business expense?

Unlike business entertainment, employee entertainment can be deducted from your taxes as a business expense if it qualifies.

You can’t make a claim for tax relief if the entertainment is:

  • Open to all employees
  • An annual event, like a Christmas party
  • Less than £150 per person

If one of these conditions isn’t met, then the whole thing can be recorded as a business expense. 

So if any employees aren’t invited, or it costs more than £150 per person, or it’s a one-off event, then the cost can be recorded as a business expense. 

Keep track of your entertainment expenses with Countingup

The Countingup business current account makes it easy to manage all your financial data in one simple app. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. 

You’ll receive real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward.
Find out more here.

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