En­ter­tain­ment expenses – make the most of the tax in­cent­ives

Parties, meals, cel­eb­ra­tions, social events: these things are an integral part of the day to day life of many busi­nesses. Being sur­roun­ded by food and drink so often makes for the perfect setting for con­struct­ive business dis­cus­sion as well as a more relaxed occasion for employees to con­greg­ate. For en­tre­pren­eurs, business dinners are an important means of winning clients, fi­nal­ising contracts, and main­tain­ing current client relations. When it comes to paying these company en­ter­tain­ment expenses. It is important that you follow all the right le­gis­la­tion; something which may help you to save some money in the process.

HMRC defines en­ter­tain­ment as any activity revolving around drinking, eating, and other forms of hos­pit­al­ity like this. Fur­ther­more they also dif­fer­en­ti­ate between ‘business’ and ‘non-business’ en­ter­tain­ment:

• Business en­ter­tain­ment – when you actively engage in con­ver­sa­tion with clients based around current and/or potential business projects. It could also be to foster current client re­la­tion­ships or establish new ones. 

• Non-business en­ter­tain­ment – also involves engaging with a client but for reasons that are social and not business related.

These dif­fer­ences and dis­tinc­tions are important for when it comes to entering them in your end of year tax reports. What type of tax/insurance you pay, as well as where it appears in the paperwork varies depending on who has arranged the event, who has paid for it, etc.

Un­for­tu­nately en­ter­tain­ment expenses are not tax de­duct­ible. But this does not mean that you cannot put the costs through your business. You will not be re­im­bursed for the cor­por­a­tion tax but it can prevent you from spending money that was already subject to income tax.

How do I file company en­ter­tain­ment expenses?

Once it has been made clear who has arranged and paid for the en­ter­tain­ment costs, then the paperwork is re­l­at­ively straight forward. Here we outline the different possible scenarios and the correct way to handle each one:

• A non-business en­ter­tain­ment that is arranged and paid for by you must be reported on a P11D form followed by you paying Class 1A National Insurance based on the value of the benefit.
  
  
• A non-business en­ter­tain­ment that is arranged and paid for by an employee means it also needs to be reported on a P11D form. Through your payroll system you then add the full cost of an expense to the wages of the employee involved and deduct Class 1 National Insurance; however not PAYE.
  
  
• A non-business en­ter­tain­ment that is arranged and paid for an employee, followed by a re­im­burse­ment from you, should be added to the wages of that employee. Once again you should use your payroll system to pay both the PAYE and Class 1 National Insurance.

On the P11D form there is an en­ter­tain­ment-related box which you should either tick or put a cross in. This is in order that the HMRC know whether to allow your employee to claim a tax deduction for the en­ter­tain­ment expenses provided by you. Place a tick in the box if the cost of the en­ter­tain­ment will be dis­al­lowed in your business’ cal­cu­la­tions for that year/quarter. Or put a cross in the box if it will not be dis­al­lowed.

It is worth noting that some business en­ter­tain­ment expenses are subject to ex­emp­tions meaning that they do not to be included in your end-of-year reports. It is possible to qualify for one of these ex­emp­tions if you are paying an expenses flat rate to your employee as part of their general salary or if you are paying back the employee’s actual costs.)

For­tu­nately there are some en­ter­tain­ment expenses that are tax de­duct­ible. Arguably the most important of these is staff parties; Christmas cel­eb­ra­tions, etc. As an employer the most important figure to bear in mind here is £150 as this is the maximum amount that you are allowed to spend per employee annually. This means that if you host multiple events during a year, you cannot exceed this £150 cap, and if you do then all this will be subject to tax. HMRC also makes sure to point out that the event or events in question are ones that are open to all employees, meaning that no one can be excluded.