Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

An entertaining round up. by Rebecca Benneyworth

by
2nd Jul 2007
Save content
Have you found this content useful? Use the button above to save it to your profile.

Rebecca Benneyworth looks at ancillary costs of business entertainment, are they all disallowable?

When a company incurs entertaining expenditure what are the tax rules? Most people understand that client and customer entertaining is not allowed as a business deduction, but what about related expenditure such as travel, and what about staff entertaining, and those employees of your sister company? Does it make any difference if you split the bill?

Customers, clients and suppliers
This category includes any non staff related entertaining. Business entertaining is excluded from deduction from profits by Section 577 TA (and now also S45 ITTOIA) . This excludes deduction for business entertaining, which is defined as including hospitality of any kind, provided by the company or an employee of the company in connection with the trade. Entertaining provided for bona fide employees is excluded from the ban by section 577(5) with a parallel in Section 46 of ITTOIA, unless the provision to those employees is incidental to the provision of entertaining to others.

It is useful to note that in trying to understand the meaning of the term “entertainment”, current HMRC manuals (at BIM 45012) lay significant emphasis on decided VAT cases, quoting liberally from a variety of appeal cases including Shaklee International, and Celtic Football and Athletic Co Ltd. Do note that entertaining supplied under contractual obligation is not disallowed – for example a course provider who organises an all day course and advertises a price “including buffet lunch” will not suffer an add-back on the cost of the lunches provided as these form part of his contractual obligation to his customers.

So any entertaining provided for persons other than employees is specifically disallowed, and the costs relating to members of staff also attending would also be added back in the tax computation. Subsection 7 (of S 577) also rules out any deduction for “expenses incurred in providing anything incidental thereto”. Although the cost of travel to an entertaining event might not strictly be regarded as the “provision of anything incidental thereto” it is reasonable to rule out incidental costs such as travel and related accommodation, and indeed BIM 45025 updated in September 2006 indicates that this is the case. The travel of an employee to meet a client for lunch would, however, be allowed as the travel is not itself incidental to the entertaining – it relates to the need for the employee to meet the client. If the employee and client travel together then the cost becomes incidental to entertaining and disallowed! (See BIM 45025) HMRC manuals also indicate that related expenditure such as paying an event management company or similar would also be disallowed.

The VAT treatment of such provision is also simple – all of the expenses of entertaining are VAT blocked, once again including the costs relating to members of staff attending as hosts or representatives of the company. However, the VAT disallowance in SI 1992 No 3222 Reg 5(1) does not include a parallel for incidental expenditure.

Gifts
The same sections also provide a similar exclusion of the costs of providing gifts but a gift carrying a conspicuous advertisement for the donor, and which is not food drink or tobacco, or a token exchangeable for goods, and which costs no more than £50 in total in an accounting period (per recipient) is an allowable expense.

Here, the VAT rules differ quite significantly, as there is no requirement that the gifts carry an advertisement, nor is the restriction applying to food drink or tobacco relevant to VAT recovery. Although Notice 700/35 (1997 edition – the current one!) lists the financial value of VAT recoverable gifts as £15, the limit was increased to £50 a year to the same recipient some time ago.

Gifts to employees are normally regarded as a benefit in kind, however there is in practice an exemption relating to small gifts at Christmas, such as a turkey or bottle of wine. This is described in EIM 21863, under the heading “Trivial benefits – seasonal gifts”.

Employee entertaining
Entertaining provided to employees is tax deductible, and any VAT incurred on it is also recoverable. This results from the exclusion of employee entertaining from the relevant legislation blocking deduction of entertaining expenditure. Both the direct tax and VAT provisions are very similar and thus the treatment is the same for both profit computation and VAT recovery. As the main expenditure is acceptable, clearly incidental expenditure will also be fine.

However, when individuals other than employees are invited to an event, this will cause a problem. Provided the purpose of the event remains to entertain staff, then the VAT can be apportioned. In addition, the treatment for direct tax also would permit apportionment provided that the expense is one which it is appropriate to apportion – that is, for example single ticket prices, for which an allowance is given for the number of tickets relating to staff members. The cost of entertaining staff is deductible provided it is wholly and exclusively for the purpose of the trade, and only incidental to any other business entertaining aspect.

HMRC manuals indicate at BIM 45033 that “staff” are accepted to include retired members of staff and the partners of existing and past employees. However, the manual very clearly excludes entertaining of staff of associated companies. It permits a holding company to recover such costs where recharged by the parent company to the subsidiaries – which of course would be able to recover the costs as employee entertaining.

In a partnership, the partners are not staff (obviously) so the element relating to the partners should also be disallowed – provided the wholly and exclusively rule is appropriately observed.

Benefits in kind
The treatment of the “annual Christmas party” or other annual event is well known. There is no benefit in kind on staff provided the average cost per head of the event (which is open to all staff, or all at a particular location) does not exceed £150. Where a party is organised on a departmental, rather than a whole company basis, the treatment is extended to include these events, provided that all staff are invited to one event.

However, the exemption (given by Section 264 ITEPA 2003) relates only to an annual event, and not a one-off event, such as a party to celebrate gaining a major contract.

If there are two or more annual parties or functions, then the £150 limit can be taken to apply to both. The average cost per head should be calculated separately, and if the total does not exceed £150, then none of the events will be taxable as a benefit in kind. The employer can choose which events are to be regarded as within the £150 limit when the limit is exceeded, so as to obtain the most beneficial result.

It is, however, possible that a benefit in kind charge can arise on entertaining expenditure already added back in the profit computation under Section 577 TA. An employee who is the beneficiary of “excessive” entertainment in the course of entertaining clients may be liable to tax on the benefit of that entertaining. This treatment is unusual, but should be borne in mind when considering employees with substantial entertaining “budgets”.

Tags:

Replies (9)

Please login or register to join the discussion.

avatar
By nick farrow
02nd Jul 2007 18:14

what a great summary
just in time for my annual P11d refresh- thanks Rebecca

Thanks (0)
avatar
By User deleted
06th Jul 2007 08:34

Entertaining or benefit for expense fraud
We have just dismissed a senior employee for expense fraud. in addition to the fraudulent items where he claimed as a business expense payments that were nothing like the description on the signed expenses sheet, the person had spent thousands in three months on entertaining, so far we have traced just one of the people and asked if he was at the restaurant with our employee on the date in question, and the reply was that he wasn't even in the country and had not been entertained on any other date either. All the other entries are names we haven't heard of, and none are in the list of contacts on the PDA or mobile phone.

As we only 'suspect' it was not business entertaining, we have taken legal action and will pursue repayment through the authorities but if we are not reimbursed, can we legitimately declare it on next years P11d as a taxable benefit, and claim corporation tax relief on the 'emoluments'?

Thanks (0)
avatar
By carnmores
04th Jul 2007 13:56

Thanks Rebecca - Entertainment company
we have a client that specialises in PR with a niche market is restaurants, as a result a large amount of money is spent in restaurants etc, is there any relief from the normal dissllowing rules as agenuine cost of sale.

Thanks (0)
Rebecca Benneyworth profile image
By Rebecca Benneyworth
04th Jul 2007 20:27

I can't find anything
I have had a search of the HMRC Manuals and can't hold out much hope. I suspected as much.

The problem is there is an exception if the company owns and runs a restaurant - there is some scope to claim that free meals to critics and similar would be deductible, but this depends on the provision being out of the company's trade.

As you have a PR concern, the only services they could possibly provide free (out of its trade) would be PR which is no help! This exception is in Section 577(10) and the guidance on it is in BIM 45032. Those with clients who may be interested should note that this is a two part test - see the manual for a good explanation of the issue.

Thanks (0)
avatar
By AnonymousUser
05th Jul 2007 16:47

directors' entertaining
As mentioned earlier, a good and useful summary by Rebecca.
However, I think that entertaining of directors needs to be considered in a little more detail, when considering employee entertaining.
As it is not normally wholly and exclusively for the purpose of the trade, then it is disallowed.

Thanks (0)
avatar
By carnmores
05th Jul 2007 20:05

Thanks Rebecca
if you cant there is hope for us mere mortals, or is it no hope

;-)

Thanks (0)
avatar
By User deleted
09th Jul 2007 14:18

Working Lunches
I never know whether working lunches / late night meals are should be treated as staff entertaining. To me, it seems reasonable for an employer to meet these costs if an employee is required to work through lunch / late for a specific purpose but I think that may be these should be treated as a benefit.

What if it is a working lunch with employees from a number of different locations / subsidiaries - does this make it business entertaining or subsistence but then what if the host company pays?

Any guidance on this would be helpful.

Thanks (0)
avatar
By User deleted
11th Jul 2007 13:20

Working lunches
My understanding is that expenditure on lunches where all employees are present, probably only feasible for small businesses, may be allowable by applying the "canteen" principles. In relation to working lunches, eg where sandwiches are brought in and work continues, is it strictly correct to disallow the deduction and create a BIK? Aren't there any concessions or the like available?

Thanks (0)
By cfield
13th Dec 2010 01:15

Leaving gifts

Coming to this a bit late but only just spotted it on the internet. Like many other accountants I suspect, nothing causes me more headaches and grief with clients than entertaining, especially those in the travel industry. One of the biggest grey areas is trivial benefits, as this is not precisely defined by HMRC and you have to play it by ear a bit. We all know Christmas turkeys are exempt and tea/coffee gets by too (unless taken to excess) but what about leaving gifts, birthday cards/flowers, appraisal lunches, etc? I tend to operate a materiality limit of £50 but wish I knew what the proper rules are. Unfortunately most tax offices seem to operate their own informal rules. One lucky employee got a £400 SLR camera from her boss when she left. He was aghast when I said it was a benefit. Too late to put it on her P11D though as it wasn't picked up until months later. What made it worse is that she came back after a few months. He didn't ask for the camera back though! "Only you would think of that", he said to me.

Chris

Thanks (0)