Written by Ray Coman
In tax terms, entertainment is a broad term. It covers any type of hospitality or gift paid for by a business. A separate report covers entertainment and staff entertaining. The basic gist is that it is a payment suffered which is not in direct return for services rendered. A common example is lunch, but entertaining could cover events and gifts. HMRC make a distinction between non-business and business entertaining.
The cost of putting on an event to publicise a business product or service is tax deductible. However, the part of the promotional event which relates to a substantial meal, unrelated show or accommodation is not tax deductible. Venue hire, events contractor, marketing material and samples are examples of costs that can be deducted from taxable profits. HMRC have stated that where refreshment costs are not lavish and incidental these can obtain tax relief. Hotel accommodation or after party type costs are not work and cannot come off profits.
Business entertaining is that sort which is carried out in the ordinary course of work. For instance, it could be typical in an industry to host events for existing or prospective clients or to cover the cost of lunch and other hospitality as part of client or other business relations. HMRC describe business entertaining as activity relating to forming or maintaining a business connection.
Non-business entertaining is any type of hospitality or gift extended to someone, other than a staff member, that is not business entertaining. Entertaining that is not carried out in the ordinary course of building or maintaining client relations. Money spent fraternising with a work acquaintance is non-business.
Neither business entertaining nor non-business entertaining can be deducted from profits chargeable to corporation tax. However, business entertaining will not be treated as a distribution of profits subject to income tax. Unlike other types of entertaining, business entertaining does not attract national insurance.
The table below clarifies the tax position. In both scenarios £10,000 is spent on entertainment:
|Business entertaining||Non-business entertaining|
|Distributable reserve (dividend)||71,000||81,000|
The table above can be useful for contractors and small business owners whose business activity include hospitality. The tax position is more involved where staff are given a fund or otherwise reimbursed for hosting and entertaining clients on behalf of the business.
Employees are sometimes permitted to settle entertainment on a company account (for instance by mechanism of a company card.) In this situation, the entertaining is not deducted from profits subject to corporation tax.
If a company completes a P11d, entertainment should be reported to HMRC on that form.
Non-business entertainment will be subject to Class 1A national insurance. It would therefore be reported under the heading "Other items" and in the box with "1A" denoted. Business entertainment is entered into the box for "Entertainment." Following the table above, entertainment would be disallowed in the profits calculation and therefore an employee can claim a deduction from their income. In this case a tick goes in the box on the P11d form. In the example where business entertaining has been deducted from corporation tax profits, it could almost be regarded as a benefit paid to staff. Therefore, a cross is entered in the box and the staff member cannot deduct the cost from employment earnings. In practice, if entertaining is the only benefit provided to an employee the annual compliance cost of filing a P11d can be avoided as explained below. In simple summary, business entertaining is either a deduction from taxable business profits or a deduction from employment earnings. With a simple summary, business entertaining is either a deduction from taxable business profits or a deduction from employment earnings.
If the only items included on a P11d form are expense reimbursement, the P11d serves a reporting function only. There is no tax collected because of this compliance. Prior to 2016/17 companies in that position could apply to HMRC for dispensation. Since 6 April 2016 it is no longer possible to write to HMRC for a dispensation from completing a P11d. However, provided the company has a control procedure in place for employee reimbursement, the company obtains automatic exemption from P11d reporting. More pragmatic is to disallow business entertaining from profits chargeable to corporation tax. As explained below, the business entertainment is not shown as employee earnings and then also as an employment expense. The effect on taxable employment earnings is nil.
The automatic exemption applies to director and therefore contractors who provide services through a company. Refer to the table above for the dividend implication.
Where entertaining is non-business it will probably be easier to simply add the amount to a payslip and run it through payroll. This has a slight tax drawback that the expense would then be subject to employee's national insurance. However, it spares the complication of P11d reporting. This would occur in the rare situation that a staff member is reimbursed for socialising with someone who may or may not be connected to work. Staff entertaining is tax deductible.