Business entertainment is the entertainment provided by a business/company to people other than employees. An example of this is the entertainment provided to customers. If it is provided to employees of the company or if it is not provided free it means it does not fulfil the conditions to be called a business entertainment.
The entertainment could be of any type such as provision of Food and drinks, accommodation in the hotels tickets for a concert or other hospitality events companies organize for their clients.
Business entertainment is not an allowable expense for tax purposes. However, if it is provided to overseas customers it can be allowable. Similarly, entertainment provided to suppliers is non-allowable expense.
Exception – Entertainment provided to overseas customers:
If your company provides entertainment to customers who are not UK resident, the expense will qualify as an allowable business expense.
VAT paid on the entertainment expenses incurred for an overseas customer can be recovered if the they are 100% for the business and are reasonable in scale and character. In case of a private benefit to an individual an output tax charge will arise, which will cancel out any recoverable input tax. Basic food and drinks provided during a meeting will not result into a private benefit, but the entertainment provided after the meeting like provision of alcohol or taking them to a restaurant for food will lead to private benefit.
Entertainment provided in corporate hospitality events like golf days, trips to events and nights clubs etc. will also most likely give rise to private benefit charge as it is not possible for the businesses to keep these events strictly for business.
When provision of entertainment give rise to a private benefit charge, you can choose not to take the VAT on those expenses at all instead of claiming VAT and then offsetting it with output VAT charge.
Entertainment provided to employees:
Where the employers provide entertainment to employees and it is for their benefit such as to improve their moral or to reward them for a good work. These are 100% business expenses and are allowable for tax purposes.
For the entertainment purpose only, the employees of the company/business include:
Persons employed by the company
Directors of the company
Subcontractors / self-employed persons who are treated by the company/business in the same way as your employees for subsistence only.
Helpers and stewards for running an event organized by the company.
VAT treatment of entertainment provided to employees
VAT paid on the expenses incurred in providing entertainment to employees is recoverable.
There are situations when the VAT recovery can be blocked by HMRC even if the entertainment was provided to employees. These are:
When the entertainment is only provided to directors or partner of a business it means the VAT paid on the expenses is not input tax so can not be claimed. However, if the director or partner attend the staff party together with employees, the VAT recovery will not be blocked HMRC. Moreover, VAT on the lunch for the business owner or directors can be claimed if it is classed as subsistence not entertainment. This can happen when they are working away from the normal business place.
The VAT recovery can be blocked on the entertainment expenses incurred for employees whose sole purpose was to entertain the non-employees. For example, if an employer decides to take 10 employees and 10 clients to a bowling club. In this case the VAT recovery will be blocked on the 50% cost as entertainment of clients is not allowable for VAT. The VAT on the other half will be recoverable. However, if the 10 employees who went to the bowling, their sole purpose was to make sure that the clients enjoy their time, then the VAT on remaining 50% will also be blocked as this will become business entertainment.
Staff Christmas party:
Staff Christmas party is an allowable expense if the business/company does not spend more than £150 per head. This limit is only applicable for corporation tax computation. For VAT purposes there is no cap and input VAT can be claimed on the entire expense if it qualifies as employee entertainment only.
Some companies may allow the employees to bring one or more family members along with them to the staff Christmas party. In such case the cost related to meals of their family members will not be allowable for corporation tax purposes and the input VAT on that cost will also be blocked.
It will not be easy to apportion the cost incurred so there is a way to deal with such situation. If the company takes some nominal amount as guest fee like £5 or more for each guest and include the Output VAT on it, it means the guest meals are not free anymore so the company in that case can claim the VAT on the entire cost of the staff party.