Entertainment & Gifting Tax Implications
Entertaining or gifting to clients, suppliers, or employees can be an effective way to foster relationships and build goodwill. However, when it comes to claiming tax relief on these costs, businesses must adhere to specific rules set by HMRC. Mistakes in understanding what qualifies as an allowable expense can lead to penalties or missed opportunities to maximise tax efficiency. This guide breaks down what you need to know.
What Are Entertaining Expenses?
Entertaining costs are incurred when hosting individuals or groups to promote or maintain business relationships. This can include a range of activities including, meals and drinks, events and recreational activities. HMRC has strict rules about what can and cannot be claimed as an allowable expense to reduce profits chargeable to tax.
Entertaining Clients and Third Parties
Expenses related to entertaining clients, potential clients, or other third parties (such as suppliers) cannot be claimed as allowable expenses.
Even though these expenses are legitimate for fostering business relationships, HMRC does not consider them a necessary business expense for tax relief. They are recorded as a business cost, but you won’t get a tax deduction.
Entertaining Employees
Entertaining employees, on the other hand, has more flexibility when it comes to tax relief. Costs for events like Christmas parties or annual summer outings are allowable for tax relief, provided:
· The event is open to all employees.
· The total cost does not exceed £150 (including VAT) per person per year.
If the cost exceeds £150 per head, the entire amount becomes taxable as a benefit-in-kind.
If the cost is under £50 per employee, this may be allowable as a trivial benefit which we go into more detail below.
What is classified as gifting?
A gift is defined by HMRC as something that is given to a person without receiving anything in exchange. It is offered voluntarily and without any expectation of a return. An example of this would be gifts provided for potential customers who take a test drive in a new car - there is no obligation to buy the car and so nothing has been given to the trader in return for the gift.
Gifts to Clients or Suppliers
Business gifts are treated in the same way as business entertaining expenditure and are generally not a tax-deductible cost. There are circumstances which will allow you to deduct the cost of the gift against your trading profits, if any of these exceptions apply:
the gift is of an item which it is the trader’s trade to provide, and it is given away in the ordinary course of the trade to advertise to the public,
the gift incorporates a conspicuous advertisement for the trader, although there are exclusions relating to the type of gift and the total amount per person must not exceed £50,
the gift is provided to the employees of the trader so long as this is not incidental to gifts being provided to others,
the gift is given to charity or other specific bodies.
Gifts to Employees
In the UK, trivial benefits refer to small perks or gifts provided by an employer to employees. These small perks are exempt from income tax and National Insurance contributions, provided they meet specific criteria:
The value of the gift must not exceed the amount of £50 (including VAT) per employee. Any gifts exceeding £50 are taxable in full, not just the excess amount.
The gift cannot be cash or a voucher that can be exchanged for cash.
The gift must not be a reward for work or part of the employee’s contractual entitlement. So as an example, a box of chocolates to celebrate their birthday could be classed as a trivial benefit.
There is no set limit on how often trivial benefits can be provided to employees, Directors however have a set annual limit of £300 (so 6 trivial benefits totalling £50 each over the course of the year).
Tips for Staying Compliant
While entertaining expenses can play a significant role in business success, the tax rules in the UK are strict and can be complex. By focusing on allowable costs and understanding the distinction between client and employee entertainment and gifts, businesses can navigate these rules effectively.
Keep accurate records: Maintain clear records of all entertaining expenses, including receipts, invoices, and attendee lists. Using a software such as Xero is perfect for this.
Separate Employee and Client costs: Ensure expenses are categorised appropriately to avoid errors in claims.
Understand the limits: Stay informed about limits, such as the £150 per person rule for staff events.
We know that navigating HMRC rules can be daunting and sometimes confusing, so if you're unsure about what qualifies as an allowable expense, please get in touch with us at Spring.
This summary is to serve as a guide, further information can be found on the Government website and it should not be taken as professional advice.