Entertaining potential and existing customers helps you to build and nurture strong business relationships. Customers who like you and your company are loyal, and they’re much more likely to stick with you even if a competitor tries to lure them away.
Wining and dining them, taking them to a show or to a football match – things like this all help to show your customer that you value them. It can also be, of course, an excellent pretext to arranging a new business deal or just making sure your client is happy. And of course, you’ll always pick up the bill.
It’s evident that entertaining customers and clients can do great things for your business, but the cost of buying tickets and paying for meals throughout the year can quickly build up. So, what can you claim back from these expenses?
This all depends on your company and which kind of entertainment your hospitality falls under.
Business entertainment of clients
If you’re meeting with a client or customer to discuss a particular business project, to form a new business connection, or to maintain an established relationship, this counts as business entertainment.
Arranging the meeting with a specific end goal in mind shows there is a genuine reason for spending.
Entertaining can be included in your company accounts when it is a legitimate business expense. You must report the cost on a P11D form, and you won’t have to deduct or pay any tax or National Insurance on it.
This applies whether you arrange and pay for the entertainment yourself, pay the supplier but have your employee arrange it, or reimburse your employee after they arrange and pay for it themselves.
Non-business entertainment of clients
Entertaining a business acquaintance for social reasons may be considered by HMRC as a “benefit in kind”. In other words, the drinks really are on you.
You could be personally liable for tax and National Insurance on top of what you spend. Unlike business entertainment, this can vary depending on the circumstances.
If you arranged the entertainment and paid for it yourself, you’ll still have to report it on form P11D, but will pay Class 1A National Insurance on the value of the cost.
If an employee arranges it and you pay, you’ll complete the P11D, then add the full cost on to the employee’s pay and deduct Class 1 National Insurance through payroll.
If your employee arranges and pays for the entertainment, the money you reimburse them counts as earnings.
So you will have to add the amount to their earnings, then deduct and pay PAYE tax and Class 1 National Insurance.
HMRC has these rules in place to prevent frivolous spending being claimed back.
Make sure you keep a brief record of who it is you’re entertaining, when, and why, as well as any receipts.
If HMRC views your entertainment costs as excessive, even if they are for genuine business reasons, they may investigate. You should keep your information organised to make things quick and easy if they do.
Are you self-employed?
If you’re self-employed, entertaining customers or clients can never be claimed as an allowable expense.
You can still pay through your business accounts – which may still be more tax efficient than paying out of your own pocket – but your accountant won’t be able to deduct the costs when working out your income tax and NI.
Are you part of a limited company?
Even though you can claim business entertainment bills as genuine company expenses, these still can’t be taken off your profits when your accountant is completing your tax return to see how much you owe.
If your business is VAT registered, you also won’t be able to reclaim any VAT on your client entertaining expenses.
What about gifts?
With Christmas coming up, it may seem that sending a gift to a client is a great way to show them that they are valued and to keep your relationship strong. To make sure these gifts are tax deductible as a business entertainment expense, they must:
- Value no more than £50 per recipient
- Be promotional, i.e. bear your branding or be a product that you sell
- Not include alcohol, food, drink, or a voucher for any of these unless your company sells them
HMRC class the £50 per recipient as a limit. Anything over that and they will disallow the full cost.
As with the dinners and events you take your clients to, there has to be a genuine, business-related purpose for the expenditure in order for them to be tax deductible.
Talk to an expert
You should seek advice from your accountant if you have any questions regarding tax or you P11D form.
For more information, contact us on firstname.lastname@example.org or call 01332 207 336