How to Avoid Mistakes in Business Entertainment Tax

23 September 2019

Business entertainment

Income and corporation taxes prevent businesses from claiming a deduction from profits for expenses spent on business entertainment. This includes taking clients out for a meal or attending a sports event. There is a similar rule for directors and employees but to prevent being taxed twice the same rules don’t apply to the same expenses.

No Double Tax

When you pay for business entertainment out of your own pocket, eg taking a customer for lunch, if your company repays your expenses, they are repaid as a separate item on your wage slip to prevent tax and NI deductions from being taken off the expenses.

As stated though, under this rule your company is prohibited from claiming any deductions against its profits for the amount you have received as a reimbursement.

Example. Josh is the Sales Manager for Page One Digital Ltd. Typically his firm spends £6,000 per year entertaining customers. Page One reimburses all Josh’s expenses so that he’s not out of pocket.

Also, for Josh there are no tax or NI consequences, as long as Page One doesn’t claim a tax deduction for the reimbursement.

Josh’s firm must confirm this position by ticking the appropriate box on the Form P11D it submits to HMRC for Josh’s annual tax.

Don’t Miss Out on Tax Relief

Owner/Managers of companies can easily fall into the trap of paying for business entertainment out of their own pocket. If they do not claim any reimbursement from the company, they will miss out on a tax rebate.

Whilst it may seem inconsequential whether it comes out of company funds or personal, if the owner does not claim the expenses back from their business, they will miss out on the deduction in the tax they will need to pay in their self-assessment. Not only will the company miss out, but they will miss out on tax rebates personally, as well.

Tip: The best solution is easy, always make a habit of claiming back expenses from your business entertainment expenditure. Meals and the like add up, over the course of a year and claiming back the tax is a nice little bonus at the end of the tax year.

Travelling to a Meeting

Another common misunderstanding is surrounding the tax rules regarding travelling to meet a client. If you (or an employee) travel to visit a client for a meeting, whilst you may discuss work over the lunch, the meal is classed as business entertainment and is therefore not tax deductible by your company.

Secondly, if you drive there and usually claim expenses on your fuel, this IS tax deductible by your company as it does not count as part of the business entertainment, it’s simply part of your annual business mileage.

Finally, if your business pays for your client to travel to see you, their travel cost is NOT tax deductible. However, your travel to see them is tax deductible. In this instance, you (as employee), would not receive tax relief on this particular expense.