A real benefit of running a business is being able to deduct expenses from your tax bill. It makes decisions about spending far easier, and as long as it makes business sense, you’re unlikely to come into issues.
So what if you want to spend money on entertainment? A staff party, for example, or a work drinks evening? What about when it comes to taking clients out? Can they be deducted from your tax bill?
Understanding the tax implications of these expenses is essential to ensure that your business is not paying more tax than necessary.
This blog post will explore the rules for business entertainment expenses and tax deductions.
What’s classed as entertainment?
When it comes to client entertainment, HMRC recognises two types:
- business entertainment of clients: discussing a particular business project or forming or maintaining a business connection
- non-business entertainment of clients: eg entertaining a business acquaintance for social reasons
Entertainment can involve eating, drinking and other hospitality.
What do I report?
You must report your entertainment spending through the government’s P11d form.
Then, depending on what kind of entertainment it was, and who made the payments, you may or may not need to deduct (and pay) tax and national insurance.
These are the various scenarios of reporting and tax deduction you need to be aware of:
- If the spending was business entertainment: you don’t have to deduct tax or national insurance.
- If the spending is non-business entertainment and you paid: you will have to pay Class 1A National Insurance on the value of the benefit.
- If the spending is non-business entertainment and the employee arranges and paid: You must reimburse the employee and then add it to their other earnings. Then deduct and pay PAYE tax and Class 1 National Insurance through payroll.
- If the spending is non-business entertainment and you arranged it but the employee paid: add the total cost to the employee’s earnings and deduct Class 1 National Insurance (but not PAYE tax) through payroll
In all instances, bar the employee arranging and paying, will you have to use the p11d form.
Your team organises a meal and you can’t attend due to a holiday. When you return, they give you the receipt.
You would reimburse them and then add this to their earnings and deduct and pay PAYE tax and Class 1 National Insurance through your payroll system.
You take a new client out for lunch and spend the whole afternoon discussing the project.
This is business entertainment – make sure you keep the receipt. You won’t pay any tax or national insurance on this expense.
You take a staff member out for a one-to-one meeting and order coffee. It turns out you forgot to bring your card, so the employee covers the bill.
Add the cost of the coffee to the employee’s earnings and deduct only National insurance from the item through your payroll system.
How do I complete the P11d form?
The form has a helpful check box to check for entertainment-related purchases.
HMRC uses this to determine whether your employee can claim a tax deduction for the entertainment expenses you’ve provided.
When filling out the form for a charity or tonnage tax company, you don’t need to enter anything, but otherwise:
- put a tick in the box if the cost of the entertainment will be disallowed in your business’s tax calculations
- put a cross in the box if it won’t be disallowed
It’s worth using your £150 (including VAT) to spend per head for events or other staff activities.
This can only be used if everyone in your business is offered it. A Christmas party is a classic example of this exemption being used. It doesn’t have to be limited to employees but can also include partners or spouses.
Tip – To get your total for this, add up all party costs, including transport and accommodation, and divide them by the number of attendees to get the total figure per head. And make sure you have a receipt for the expenses you are claiming.
If you’re already keeping track of all your spending, encouraging staff members to keep any receipts for all work-related spending, and doing minor financial planning, you’ll be in a great position to deduct entertainment expenses from your tax bill successfully.
But, like everything in business, there’s always something around the corner that you might be unsure about.
Get in touch with us, and we’ll help you with your entertainment expenses.