The long and short of it is this—entertainment expenses are not usually tax-deductible for businesses in the UK. Thus, companies cannot claim tax relief for these expenses to reduce their tax bill and cannot claim the VAT back on expenditure from accountants. However, some circumstances are not quite so clear-cut.
Taxation and VAT are complex systems – there will be exceptions to every rule, and you might need personalised advice. If an event is only for staff, the expenses can be tax-deductible because they are classed as an employee reward, not entertainment. We will cover various situations below, so you can understand the full scope of tax-deductible expenses and what you might be able to save.
How Do Expenses Become Tax-Deductible?
First, let’s understand what the term means. A tax-deductible expense can be taken off your taxable income. This means you don’t pay tax on it. The amount that you do pay tax on is called the taxable profit.
Here’s an instance of how it works. Imagine that your business has a turnover of £50,000. £10,000 is allowable expenses, which are essential business costs that are not taxable. You can take this £10,000 off your turnover total when paying tax—so you will only pay tax on £40,000.
Accountants can still declare entertainment expenses through your company to save on income tax, but they won’t be tax-deductible. Anything that is an actual business cost can be arranged through your company.
Even though entertainment expenses aren’t usually deductible, accountants will advise that other business expenses are. These include:
- Advertising costs
- Business premises costs
- Insurance and bank charges
- Office costs
- Raw materials
- Staff salaries
- Travel
- Uniforms
But How Can Accountants Deduct Entertainment Expenses?
There are some exceptions to the rule regarding Her Majesty’s Revenue and Customs (HMRC) systems. These usually have to do with events for your staff, which can be classified as a reward rather than entertainment. You can put company events, such as the annual Christmas party, through the books, which will be tax-deductible.
However, keep the following guidelines in mind:
- The total spend per head cannot exceed £150 annually. If it does, the entire amount will be considered a benefit in kind, and you will have to pay tax on the whole amount, not just the amount that exceeds £150.
- Your staff cannot entertain clients and claim tax relief. Employees hosting clients at an event is no longer considered a reward—it is entertainment.
- Only staff costs will be tax-deductible if staff and clients are present at the event. Make sure to calculate this accurately.
Here’s a potential scenario for application purposes: If you spend less than £150 per person on your annual Christmas party, the cost is tax-deductible. Take note that this only applies if the attendees are purely employees.
If clients are invited and attend, their portion of the price is not tax-deductible. The same applies to employee-hosted conferences where clients or suppliers are invited to participate. Even if it is a company event, since your workforce is hosting, they are instantly considered entertainment costs.
Conclusion
You can iron out these details with Accountants247 in Urmston today! We make things simple: You pay us a monthly retainer, and we’ll cover your accounting needs without any surprise expenses. Call our team of accountants and get your quote now!
