Thinking about wining and dining your clients to secure that deal, maybe you should think again?
We’ve heard it all before, “charge that to the company card” as they flash the plastic to cover the cost of two meals, with wine. Suits, seafood and scotch. Do they sound like business expenses you can claim tax back on? Well no, that’s because they aren’t.
Sure you can charge things to the company card as a business expense, but don’t expect to get tax back on it.
Treating your client to lunch can have its payoffs. Whether that’s selling a product, securing a deal or to make a lasting impression. But what impression will that make on your tax books?
We want to look at what a ‘Business Entertaining Expense’ actually is, what you can claim for, and where you can fall into trouble.
Is Entertaining a Business Client Tax Allowable?
To put it simply the answer is no. You cannot claim any VAT back on entertaining your clients.
So what is a business expense?
An expense is tax allowable for corporation tax purposes if it is wholly and exclusively used for business purposes.
An exception to this rule is business entertainment of clients.
HMRC defines Business Entertainment of clients as any form of entertainment that is provided free of charge to any non-employees. This can involve eating, drinking or any other form of hospitality.
What’s important to note when claiming it as an expense, is what HMRC deem as Business Entertainment and Non-Business Entertainment of clients.
Business Entertainment of clients – e.g discussing a particular business project or forming or maintaining a business connection
Non-Business Entertainment of clients – e.g entertaining a business acquaintance for social reasons
The former would be considered a business expense as its purpose was wholly and exclusively used for business. Talking over a future deal, or trying to secure an investment etc.
The latter would be seen by HMRC as a benefit to yourself, therefore it falls into the non-business entertainment category. That expense will then be treated as a taxable Benefit In Kind and be subject to personal tax and insurance, not ideal.
There aren’t many guidelines on when or where an expense falls into the Non-Business Entertainment category, but you can normally figure it out for yourself. Just don’t go too over the top.
Therefore it still makes sense for you to put client lunches through as a business expense, although not tax- deductible, as long as you comply with the rules of HMRC.
Is it worth claiming as a business expense if I won’t get any tax back?
Yes, it is still worthwhile putting it on the company account.
Not only does it help keep track of all your business spendings it also won’t come out of your after tax personal funds.
If entertaining a client isn’t tax allowable, what kind of Business Entertainment is?
According to HMRC:
Where an employer provides entertainment for the benefit of employees for example to reward them for good work or to maintain and improve staff morale, it does so wholly for business purposes.
Thus the VAT incurred on entertainment for employees for example staff parties, team building exercises, staff outings and similar events is input tax and is not blocked from recovery under the business entertainment rules.
Again, this has some exceptions, and again, it is the same murky area of when it becomes too beneficial for the employee where they might incur personal tax on the benefit.
When it comes to Business Entertaining expenses it comes down to knowing your limits, and sticking to the main rule of using the expense wholly and exclusively for business purposes.
If you are left thinking, what other expenses have I misunderstood to be tax allowable when they aren’t? Here is a short list of the most common misconceived non tax allowable business expenses.
Frustratingly childcare isn’t seen as a direct business expense by HMRC and is a non deductible expense
- Lavish conferences and meeting rooms
Similar to our entertaining issues, if you decide to go overboard with the fancy meeting rooms then don’t expect to see any of it returned to you, and you could potentially get taxed for Benefit in Kind.
- Unrecorded cash transactions
This can definitely be a dangerous one to mess around with. Cash transactions can of course be put through as a business expense, just make sure you record it and keep the evidence to match the books, otherwise you could face more than just paying personal tax
About the Author
Gary Easton cut his teeth working at one of the Big Four auditors KPMG. However, a few years ago, Gary decided that SMEs deserves a better service and left to found Tax IQ, a specialist SME accountant based in Edinburgh.