As the tax return deadline approaches, businesses are faced with a major challenge: They not only need to communicate their tax returns to the HMRC, but also their previous year’s profits. Small businesses, self-employed individuals, and freelancers need to take the cash inflow and outflow principle into account when calculating their profit. But what exactly does this mean? This guide will help...
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.
What are business entertainment expenses?
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.
Are entertainment expenses tax deductible?
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.
Entertainment expenses: proof is everything
Regardless of whether it’s a simple dinner, a Christmas party, or special occasion (anniversary, etc.), it is of utmost importance that the expenses are comprehensively and correctly documented and that all the required paperwork is available. Otherwise, this will lead to complications with the authorities later.
Of course, it is important for you to have a suitable accounting system and to be aware of where and how details on entertainment expenses need to be booked. Equally important is that you fill out the right paperwork and hang onto the correct documents in order to prove the expenditures that have been made. Exactly how to go about dealing with entertainment expense receipts can be read about in these articles.