One of the most important marketing tactics that many businesses use is business entertainment, especially for retaining new clients and customers. Spending cost on business entertainment matters a lot when you want to build a network and attract new clients. So, if you’ve decided to allocate a marketing budget for entertaining clients and customers, you may think that whether the client entertainment is tax-deductible or not. Read on to find out the answer!
Getting professional advice from a VAT accountant is preferable to reclaim VAT and to be saved from hefty tax implications that can wipe out your profit. So get in touch with our experts to be on the safe side!
What is Entertainment as per HMRC?
Entertainment is anything done for hospitality. Here is a list of common examples of entertainment:
- Offering food and drink
- Providing accommodation
- Provision of concert tickets and theatre
- Entry to sports events and clubs
- Use of capital assets for entertainment purposes
Is Client Entertainment Tax Deductible?
The simple answer to this question is ‘no’. As you can normally recover input tax, you paid on goods or services exclusively for business purposes. Generally, the cost incurred on entertainment for clients or customers is not considered business entertainment. For this reason, it is not tax-deductible and VAT cannot be recovered from it. However, still, there are few instances where a person can reclaim VAT, but the rules are complex and troublesome.
For instance, if there is an entertainment party where you have invited your staff or employees, input tax on the cost spent on employees can be reclaimed. But still, reclaiming VAT on it is not that simple. If the employees acted as the host at the party, then the cost incurred on employees cannot be reclaimed.
Is Client Entertainment Deductible for Corporation Tax?
According to HMRC, client entertainment is not deductible for corporation tax purposes. Hence, you need to pay for the cost of entertainment like the cost spent on a dinner for a client from the bank account of the business. In this stance, you need to bear in mind that the expenses that incur from your company need to be a genuine business cost and they must not be extra or excessive.
Now, you might be wondering whether is it worth spending on client entertainment. It’s up to you and may vary based on your business’s nature and the clients you want to build up.
Although the entertainment cost of the business is not favourable when it comes to taxes and VAT, however, you can establish good relations with your business associates and win new contracts for your business. Therefore, we can conclude that the initial investment needed to win projects is worth your time and money.
Entertaining Overseas Clients/Customers
You can reclaim the VAT incurred on the entertainment cost of the overseas customers/clients carried out at a reasonable scale, which is done only for business purposes. As per HMRC, an overseas customer is someone who’s not an ordinary resident of the UK or performing its business activities in the UK ( including the Isle of Man).
However, there’d be an output tax if there’s a personal benefit to the overseas customer by the entertainment. In this way, it will cancel out any recoverable input tax. In most cases, the private or personal benefit is linked with business entertainment. But if the expenses are strictly for business purposes, the private benefit can be ignored.
Knowing whether the client entertainment is tax-deductible can be complicated as there are many factors involved. However, as a general rule of law, it is not tax-deductible as it is not wholly and exclusively done for business purposes. On the other hand, you can reclaim VAT on the expenses incurred on the entertainment cost of employees or overseas customers, provided they’re only for business purposes. For detailed information about business entertainment, you can visit the HMRC website.
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Disclaimer: This blog post provides general information on the above topic.