Advice: Why accounting for business entertaining needn’t be too taxing

March 28, 2014

With another tax year about to end, businesses need to consider how they are treating expenditure on entertainment, both in their own tax workings and the annual employer returns to HMRC.

Paul Bray, pictured, a tax partner in the Bristol office of accountancy and investment management group, Smith & Williamson, has the following advice on what can be a confusing issue:

Customer and contacts entertaining

In general terms, the cost of holding promotional events is the same as other business entertaining such as lunches or other hospitality. The expenditure is not allowable for income or corporation tax purposes and needs to be separately identified from within the accounting records when preparing the tax return for the business.

However, it is not all bad news. A company, partnership or sole trader organising a function for customers and potential customers, spending £800 on the hire of the room and £1,800 on hospitality and catering should be able to claim the room hire cost as allowable. This is because the purpose of the meeting is to attract business and the entertainment is incidental to the promotional purpose, rather than the room hire being incidental to the provision of the entertainment. 

The costs of sponsoring sporting, cultural or other events for the purpose of business promotion/publicity are not disallowable but it is common for sponsors to be entitled to a number of free tickets, private boxes or other benefits as part of the sponsorship package. The cost of sponsorship is not allowable if the sponsor receives tickets or other benefits but HM Revenue normally accepts a disallowance equal to the value of the tickets or other benefits received. 

Tax tip: It could be that the routinely disallowed expenditure is partially allowable for tax purposes; careful categorisation of expenditure is vital to obtaining such a tax deduction.

Staff entertaining

Staff entertaining expenditure is an allowable deduction. There will normally be no tax or national insurance due on annual functions e.g. Christmas party, summer barbecue, provided they are open to staff generally, and the cost is no more than £150 per head (not per employee). “Cost” includes the cost of the venue, food, drink, music, accommodation, taxis and VAT. If the expenditure exceeds this amount, the employees are potentially taxable on the cost per head.

Tax tip: In order to avoid employees being taxed on their attendance at say, the firm’s Christmas party, it is possible for the company to settle the tax and national insurance due on a grossed-up basis under what is known as a PSA (PAYE Settlement Agreement).


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