Entertainment and gifts
Written by Ray Coman
Entertaining clients or any other person, apart from an employee, is not a tax deductible cost. Similarly, VAT on entertaining cannot be deducted from any tax liability.
Business entertainment includes any kind of hospitality which is provided free of charge. Examples include the providing of meals, drink, accommodation, tickets to events and use of assets, such as yachts.
Even where the entertainment can serve a business purpose, such a subscription to a golf club, it is still not permissible to deduct the cost from taxable profits. Costs incidental to the entertainment, such as travelling costs are also disallowed.
The entertainment will be allowable where the recipient is under contract to pay or reciprocate with an equal exchange. Merely hoping that recipient will reciprocate is not however sufficient.
Entertaining staff is an allowable tax expense. Where you entertain both employees and non-employees, only the costs relating to employee entertainment are allowable. The entertainment should be for a business purpose and should not be unduly lavish.
Entertainment provided only to directors, sole traders or partners is not considered as staff entertaining.
Staff meals are allowable, provided they are available to all staff. For instance, free or subsidised meals at a canteen would be free of tax and national insurance.
The meaning of 'employees' for staff entertaining and meals is extended to include contractors and outsourced workers in certain circumstances. 'Staff', however, would not include visiting suppliers.
In general, business gifts are not allowable. A gift is offered free of charge without any expectation of reciprocation. However, where the total cost of gifts to any one person per year does not exceed £50 and the gift includes an advertisement for the business, it is allowable. Gifts of food, drink, tobacco or exchangeable vouchers are not deductible expenses regardless of the cost.
Similarly, you can reclaim VAT on gifts only up to the value of £50 per person, per annum. However, it is possible to recover Vat on gifts of food, drink and tobacco within these limits.
Free samples of your own product are allowable in full, even if they are food, drink or tobacco.
A tax deduction can be made for promotional gifts and prizes provided these are made available to the public, and not only select individuals. The gift should contain an advertisement of your product or service. A 'prize' may include a quid pro quo, in which case it is not treated as a gift for tax purposes.
Incentives and similar promotions for staff are not treated as gifts for tax purposes. Although benefits provided to an employee can generally be deducted from taxable profits, the gift or benefit may be taxable in the hands of the employee, and subject to employers' national insurance.
Gifts made to charity can be deducted from business profits and there is no longer a requirement for the gift to be related to business expenditure and for it to be small.
Many taxpayers end up paying more tax than necessary due to a confused and incomplete understanding of the rules. We provide clear advice and a complete tax compliance service to assist with keeping your taxes to a minimum. Please contact us to arrange a meeting.