I am bookkeeping for a designer who is operating as a Limited Company.
He has a studio where he does most of his work, but he also works away from home during the week for 1 to 4 nights a week, a couple of times a month, for a variety of different end-clients.
Clearly his travel expenses (mileage, train fares etc) and his hotel expenses are deductible against the tax of the company, as is the VAT where VAT applies.
Whilst away from home, sometimes he eats alone, typically for under £10 at lunchtime and under £15 in the evening. Again tax and VAT deductible.
However sometimes when he goes for lunch, he is in the company of his client, and wishing to maintain good relations with them he pays for their lunch. Again, not excessive amounts, although lunch-with-client typically slightly more costly than lunch-alone, but when he's charging them big per-day rates, he doesn't want to be seen to begrudge them a Chicken Fajita and a glass of Sauv. Blanc. We're not talking Lobster-and-Champagne 1980s style "lunches" here.
But - does buying lunch for your client count as "Entertaining"?
Can we split the bill, 50% "Subsistence" and 50% "Entertaining", and the VAT ditto?
Occasionally my designer visits clients in the company of a self-employed associate who subcontracts for him. And again my designer pays for the associate's lunch. The associate is not an employee, but neither is he a client. How should I treat this?
I'm going around in circles with this, far more than the amounts involved can really justify. Obviously I'm trying to do the most tax and Vat efficient job for my client, the designer, as in general his overheads are pretty low, but at the same time I don't want to fall foul of any rulings should he/we be required to justify the decisions we have made re. these costs.
BTW he is pretty good at noting on his receipts where it was him+client, or him+associate, and most restaurant receipts note the number of covers, so there's little debate about which bills are for him alone, and which are for him+another.
Comments welcomed please!!
Replies (12)
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I take your point
But entertaining is entertaining. If your client wants to claim subsistence he has to sneak off and eat alone.
Entertainment disallowed for CT & VAT
The rules on entertainment expenses are quite clear. They are disallowed as deduction from the company's profits for corporation tax by s.1298 CTA 2009 and you cannot claim input VAT.
The only exception is for the entertainment of employees - customers, potential customers, work colleagues and self-employed sub-contractors are not employees.
As to whether you can split the expense between subsistence and entertainment, I agree with Peter. In particular, note the VAT paragraph:
"But you cannot reclaim any VAT at all if the sole purpose of the business entertainment is to entertain a non-employee - for example, if you or your employees act as a host to a non-employee"
Your client - the director of a company - is clearly acting as the host when entertaining clients by "wishing to maintain good relations with them he pays for their lunch".
The tax rules are puritanical - if you want a tax deduction, you do your penance by eating alone, but if you want a jolly party with others, you don't get the tax deduction.
Presumably client is still personally better off?
He is not buying his lunchtime KFC bargain bucket out of his own pocket.
The rules are stupid!. It is debatable if the SOLE purpose is entertaining the customer. Your client would be eating a meal anyway. I am not convinced that HMRC's draconian interpretation would stand up in court.
It is a different situation to having a box at a football ground or a golf day or a day out at Silverstone.
Alternatively, he can get round it by paying two bills - the one for subsistence, the other for entertainment.
... and that's why ...
I have never seen an inspector (CT, PAYE oo VAT) ploughing through odd bills for coffee and snacks. I'm sure some do but most of these people are eminently sensible and apply a materiality measure even if there is not one enshrined in law.
Agreed
And even when inspectors find things they don't usually do anything other than advise unless they are trying to make a point or it is systematic abuse.
I have a slight variation on this question.
If an employee agrees to meet a potential client for coffee but on a regular basis the employee's subsistence claim for drinks & food consumed just before the meeting far outweighs the cost of the coffee with the client- would the cost be staff entertaining as it is not entirely necessary for the purpose of the business rather than subsistence. Or would the tax treatment follow the reason for him incurring the expense I.e. third party entertaining. The journey to the meeting from his home and the length and timing of the meetings ( mid-morning) don't justify the company paying for subsistence.
The journey to the meeting from his home and the length and timing of the meetings ( mid-morning) don't justify the company paying for subsistence.
Then why are they paying for it?
There are many reasons why we pay the claim but I am seeking opinions about how to treat the cost.
You are being asked about that point because there's a requirement for the employee to be "obliged to incur and pay" the costs in order to avoid the taxable benefit if the company chooses to pay them. By the sound of it, there is no good justification and the benefit should therefore be taxed.