Here’s our simple guide.
Obviously, at the margins, common sense needs to be applied.
Business Entertainment
Not an allowable expense for corporation tax or VAT.
If clients or suppliers are the primary reason for the expenditure, then it’s probably business entertainment, but; if a lot of staff attend relative to customers, consider if some of the expense might be better treated as staff entertainment.
Staff Entertainment
If staff meet and the business pays for drinks, food, or event costs, these costs are fully tax-deductible, and VAT can be recovered.
However, there is a “cap” of £150 per employee which applies for benefit in kind (BIK) calculations. If you spend more the £150 per person per year, then the surplus is taxable as a BIK and needs to be declared on P11Ds.
You can agree with HMRC to settle the tax on such events by way of a PAYE settlement rather than declare the BIK, but it’s an expensive solution as you have to gross up the BIK.
Travel & Subsistence
It is an allowable expense for corporation tax and VAT.
Must be incurred whilst away from the office for business purposes.
Includes food, drink, hotels, etc. No limit on the costs, but they have to be “reasonable” and the same for all staff.
Not a BIK unless you provide a per diem cost in excess of HMRC’s allowance.
Food in Office.
The provision of basic refreshments in the office (tea, coffee, etc.) is ignored for tax purposes.
A free or subsidised canteen can be a tax-free benefit; however, this doesn’t normally apply to small businesses.
For small businesses, meals provided in the office during meetings can be treated as tax-free (for example, a working lunch); however, even then, such lunches should be reviewed for reasonableness – if you provide such lunches on a regular basis, these are likely to be deemed by HMRC to be Staff Entertainment.
Director’s Spend
The alternative to putting the cost of a meal through the business is to charge it to your Director’s loan account. If in any doubt, this is undoubtedly the safest route to follow. Ultimately how business owners choose to categorise these types of costs will depend on how confident they feel about justifying their treatment to HMRC if ever challenged.
