There are a number of reasons a limited company might incur expenses which fall into the category of entertainment. This might involve lunch with a potential client, rewarding employees with a staff dinner, or special occasions such as the office Christmas party.
For the most part, entertainment expenditure is not tax-deductible. Nor can VAT be reclaimed on most expenses within this category. However, the rules are not quite as straightforward as that and there are some circumstances in which things may be a little different.
Whether you entertain existing clients or potential ones, you cannot offset the expense against corporation tax. Theoretically, the VAT can be reclaimed on the portion of the expense that relates to staff as opposed to the client. However, if the relevant member of staff acts in the role of host and the event is solely aimed at entertaining your client or prospect, then you will not be eligible to
What you can do, however, is pay for the event using company funds instead of your own money. Even if you own the company, this is more tax-efficient than paying for the event personally. If you use your own money, then you are effectively spending company funds that have been passed to you as salary through the filter of income tax. If you pay using the company’s money, then you are using resources that have not been subject to income tax and will therefore make a net saving.
When it comes to entertaining staff, your company can pay for annual events without any personal impact on tax as long as the total expenditure does not exceed £150 per head. This budget applies per year rather than for each event, but it can be split across multiple events. Your company can throw multiple annual events as long as the total cost of all events combined must not exceed the £150 per head limit. This can include costs such as food and drink, tickets or entry fees, accommodation and travel home.
VAT registered companies at the standard rate can also reclaim VAT on these expenses, but only on the expenditure that relates to members of staff. If there are also guests at the event, no VAT can be reclaimed on their portion of expenditure. So if you held a party for ten members of staff and each brought one guest, you could only reclaim 50% of VAT because only half of those at the party would be staff.
Be careful to stick to the £150 per head limit. If you go over by even £1, then the whole amount is treated as a benefit in kind and taxed accordingly rather than just the portion of expenditure that goes above the limit. Bear in mind also that HMRC will apply common sense in deciding whether an event is really a business event. If you are the sole employee of your company and throw an “event” to which all your friends and family are invited as guests, this will likely be disallowed by HMRC.