A guide to entertainment expenses 

As a business owner, you know that entertainment expenses are an important part of your overall financial picture. Not only do they help keep your staff happy and increase their morale, but they can also provide tax advantages to your business. But navigating the world of entertainment expenses can be tricky - what kind of expenses are tax-deductible, and which ones aren’t? ​

This guide will provide you with the information you need for entertainment expenses:​

Entertainment can mean food and drinks, social events, corporate boxes, trips, accommodations, gifts, and more. Entertainment expenses are what you’ve paid for your employees’ or customers’ entertainment. ​

There are specific rules applied to different ‘categories’ of entertainment expenses. For example, some expenses are fully deductible with no employee benefit implications, but some are not. There are situations where entertainment expenses are 100% deductible but still treated as a taxable employee benefit. ​

The general rule about entertainment expenses is that anything other than staff entertainment is not tax deductible. This goes against the standard rule of ‘if it helps you to generate business income and is a genuine expense of the business or trade, it’s deductible’. ​

There are a few exceptions to the rule, as detailed below. Please note this is not an exhaustive list of entertainment expenses. Visit HMRC's website to learn more.​

Goods or services provided in the normal course of business and provided for payment are not treated as business entertainment, and therefore are tax deductible. ​

For example, a theatre is in the business of selling tickets for shows for entertainment. Since this provision of entertainment is in the normal course of business and is done for payment then the cost of putting on this entertainment is a deductible expense. ​

If the theatre tickets are subsidised or given away, then unless it is for the purpose of advertising, then the cost of this entertainment would not be deductible, since no (or reduced) payment has been received. ​

When visiting the hairdressers, customers generally expect to be offered a hot drink. Since it is customary to provide one and the cost of the drink provided is not excessive, it is treated as being included in the overall price that the customer pays. The cost of providing these hot drinks is not treated as entertainment and is tax deductible. ​

If a business gives away its own goods and services (which it ordinarily trades in) to the general public either free of charge or for a subsidised payment as a method of advertising then it is treated as deductible. ​

For example, if a kitchenware manufacturer gave away free samples of its latest frying pan this would not be deemed as entertainment or gifts since it has done so in order to advertise its new product. ​

If, however, the manufacturer designed and produced a special product, specifically to give as gifts, then this is deemed as business entertainment and is not deductible, since the products given away are not produced in the ordinary course of business. ​

The other condition that needs to apply in order for such entertainment and gifts to be deductible is that the products or services must be offered to the general public (or a general targeted group, such as free beauty products provided to celebrities in the public eye) and is one-off trial rather than repeated provision of free goods or services.​

Staff entertainment is deductible, unless it is incidental to the cost of entertaining customers. ​

If an employer puts on a Christmas party or a Summer event for the benefit of their employees only, with the intention of motivating staff and boosting morale, then this is deemed to be expenditure incurred in the ordinary course of the trade and is tax deductible.​

If, in contrast, you put on a party for customers to thank them for their custom over the year and staff were also invited to attend, this would not be treated as tax deductible.​

Although staff entertainment is generally a tax deductible expense, there could be employee benefit implications meaning that PAYE and NIC implications may arise.​

If the event is an annual function (such as a Christmas party), is provided to all employees and the cost does not exceed £150 per head, no tax charge will apply. If two annual events are held during the year this £150 charge applies to the aggregate cost for both events.​

If the cost of the event exceeds £150 per head it is still tax deductible for corporation tax or income tax purposes, but PAYE and NIC will be chargeable on the full cost of the event. ​

Since it is often difficult to assign the cost of putting on an event to individual employees, employers often choose to pay for the PAYE and NIC obligations that are usually payable by the employees via a PAYE Settlement Agreement (PSA), which means the employer instead meets these liabilities.​

VAT can’t be claimed on non-deductible entertainment expenses. ​

The general rule is that VAT incurred on goods and services used for a business purpose can be recovered as input tax. However, if this input tax is incurred by you on the provision of business entertainment to UK business contacts and non-UK business contacts who are not customers it cannot be recovered. ​

The input VAT incurred on employee entertainment can be reclaimed, since it is incurred wholly for business purposes, except in the following two cases:​

You need to keep records such as invoices or receipts in order to make claims. As required by the HMRC, you also need to keep records of the following information:​

Keeping these records will help you to calculate the entertainment expenses you’re eligible to claim. It also helps you to identify which entertainment expenses are 100% deductible and which are not.​

Beany are accountants for ambitious businesses. Delivering big firm expertise without the big cost, we take care of all annual work including financial statements and tax returns, along with day-to-day bookkeeping. And we love to work on more complex concerns such as strategic forecasting, financial insights, buying or selling a business and all things accounting related. With Beany, we help people make smarter decisions for their business and lifestyle through our responsive, friendly expertise. Book a call today to discuss how we can help your business.​