Entertaining has been in the news recently, with details of concert and football tickets received by a range of high-profile Parliamentarians attracting attention. Accordingly, for this month’s back to basics, we thought it would be a good idea to refresh the rules for employers around entertaining staff and third parties, as there are a range of potential tax consequences to consider.

Business entertaining of third parties

Business entertaining includes providing hospitality or entertainment to third parties – whether suppliers, customers, prospective customers or advisers. For example, customers could be entertained by a day at the races, a meal, or a trip to a football game.

In general, the costs of such entertaining are not tax deductible, meaning there is no tax relief for the costs incurred by the business in providing hospitality. These restrictions were introduced for both income tax (relevant to sole traders and partnerships) and corporation tax (relevant to companies) in the mid-1960s, as it was perceived that business entertaining was getting too lavish. Similar rules prevent any recovery of associated VAT costs.

There are two exceptions to this rule when tax relief for business entertaining costs is available. These are:

• when providing entertainment is the trader’s actual business, or
• the entertainment is provided primarily to employees of the business.

When checking for entertainment costs to disallow, it’s important to consider other areas where entertainment may also be provided. For example, a product launch or sales pitch, may have both allowable business costs, but also elements of entertaining, leading to a more complicated tax position. It’s important therefore to analyse sales, marketing and advertising costs as well as business entertaining accounts to ensure that there is no element of entertainment that needs to be disallowed.

HMRC provides a substantial amount of guidance in their manuals on business entertainment, highlighting just how complex it is.

Business gifts to third parties

The cost of gifts to a third party are also generally disallowable for income and corporation tax purposes. However, there is an exemption to this rule when the gift has been made in the ordinary course of business. For example, a gift of a product sample to a prospective customer, or sales of discounted goods at the end of the day to prevent waste would be allowable. HMRC will also accept that a bunch of flowers provided with a car is not a gift, as effectively this is just part of the cost of the sale, and similarly discounts or gifts for bulk purchasing are really discounts on sale.

Gifts which incorporate a conspicuous advertisement for the trader can be tax deductible subject to two restrictions. Firstly, expenditure on gifts of

• food;
• drink;
• cigarettes or other tobacco products; or
• vouchers which can be exchanged for goods

are never tax deductible. Secondly the total value of tax-deductible items gifted in a tax year to the same individual must be less than £50. This means there can be no tax relief for the cost of giving a gift of a bottle of wine to a customer or supplier, but the common examples of branded mousemats, stationery items or chargers would be allowable, as long as the total value of gifts to one person is less than £50 per tax year.

Gifts to a registered charity by sole traders or partnerships can be deductible provided that they are ‘wholly and exclusively’ for the business. This means that gifts to local charities, perhaps accompanied by some publicity, will generally be tax deductible as the business might be expected to generate some goodwill for their trade.

Each case must be considered on its merits, but gifts to charities connected to the owners, or done without publicity, are less likely to be considered tax deductible. In these cases, the owners may be able to obtain some income tax relief through Gift Aid.

The rules for charitable giving by companies are different and companies can usually get full relief against Corporation Tax for donations to registered charities - unless the company receives benefits in return which exceed certain limits set out in HMRC guidance above.

The position for staff

The rules for staff entertaining introduce a different element to consider in addition to tax deductibility for the employer – whether or not the provision of the entertainment by the employer could create a benefit in kind for the staff.

Tax exempt entertainment and gifts for staff

The main exemptions for entertaining and gifts which will not create a benefit in kind for employees include:

• Annual parties such as a Christmas party or summer social costing less than £150 a head.
• Gifts which fall within the trivial benefits rules, and cost less than £50 a head.
• Meals provided in the course of a training event, which are incidental to the training, or which are part of general travel and subsistence for work purposes.

We have covered the conditions for tax exempt parties and gifts previously in Employer Focus in the context of Christmas parties and gifts.

From the employer’s perspective, tax relief should be available on the costs of any party which falls within the exemption above. VAT costs should also be recoverable for parties that only staff attend. If the partners of staff members are invited – or the business is unincorporated and the sole trader or partner attends - then VAT recovery needs to be restricted for non-staff members and business owners. This is complex, and HMRC have provided more guidance in the form of VAT Notice 700/65: Business entertainment. 

Other entertainment by the employer

Outside of the above exemptions, an employee may receive entertainment either as part of attending an event held by their employer which has both staff and third-party attendees – for example an event with prospective customers at a local football ground, or a wine tasting evening.

For the business, in general, the costs of providing entertainment for both the third party and the staff member will not be allowable for the business.

From the perspective of the employee, if entertaining clients is part of their job, then usually no taxable benefit arises by virtue of them attending. A benefit in kind will arise though if the entertainment is not business-related and is specifically intended to reward them.

For example, if a company has a corporate box at a football stadium and usually hosts customers, but one week the company allows the staff to use it with no customers invited, a benefit in kind would arise on the staff attending that game. It would be necessary for the employer to calculate the value of the benefit for PAYE purposes. This would need to be taxed on the employee, or the employer could see if it could be included in a PAYE Settlement Agreement as an irregular expense and pay the costs of the tax for the employees concerned themselves.

Receiving entertainment from third parties

Finally, it is possible that an employee may receive entertainment or gifts from individuals or businesses other than their employer. This should not give rise to a benefit in kind provided the following conditions are met:

• The person providing the entertainment or gift is not the employer or connected with the employer.
• The employer, or anyone connected with them has not directly or indirectly procured the entertainment or gift.
• The entertainment or gift is not being provided in recognition of any services which have been - or are to be - performed.

Where the exemption applies, it covers not just the employee, but any family members who come with them to the entertainment, or benefit from the gift. More guidance is available in HMRC’s Employment income manual.

But if there is an element of reward – for example a manufacturer looking to reward a customer’s sales team by paying for a meal or a day out – then this does become part of the employee's remuneration and needs to be valued and taxed as a benefit in kind. 

Summary

The position around entertaining is very complex, with the boundaries often defined by both case law and HMRC guidance. Employers looking to provide entertainment should take advice in advance to understand any potential tax consequences for themselves or their staff.

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.  

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