Taxation of entertainment expenses (480: Chapter 20)
How to tax employee expenses for entertaining clients.
Overview
20.1
This chapter is for all employees and directors. In the context of this chapter, references to a trade include references to any business, profession or vocation.
Employees of concerns carrying on a trade
20.2
Section 577 ICTA and Section 45 ITTOIA
Where an individual is employed by a trading organisation (including a nationalised industry), the effect of the Taxes Acts is to prohibit a tax deduction for entertaining expenditure.
The disallowance for tax purposes of entertaining expenses may be made in one of 2 ways, in computing the tax liability of the employer, or in computing that of the employee. The course followed will depend upon the circumstances in which entertaining expenses are incurred.
20.3
Section 577 ICTA Section 45(2) ITTOIA
Where an employee receives an allowance which is specifically earmarked for entertaining, and the employer is not a tonnage tax company, the payment is disallowed in calculating the employer’s tax liability.
This is also the case for any other kind of payment which is specifically made by the employer for entertaining, for example, where the employer meets the employee’s bills for entertaining or reimburses the employee for expenditure on entertaining.
20.4
Section 357
Where a payment is disallowed to the employer, or if the employer is a tonnage tax company, the employee is not affected by the special provisions about entertaining mentioned in paragraph 20.2. Reasonable entertaining expenses incurred at genuine business occasions will be covered by the exemption detailed in chapter 2.
The expenses of a particular occasion will normally be exempted if the purpose was to discuss a particular business project. They may also be exempted if the purpose was to maintain an existing business connection or to form a new one, even though no business was actually done.
20.5
Where the entertaining expenses incurred on a particular occasion are exempted no restriction is made for the cost of the employee’s own meal.
20.6
If the entertainment expenses are not exempted under the ordinary expenses rule the employee is taxable on amounts reimbursed by the employer even though those amounts may have been disallowed to the employer. Therefore, no allowance can be given for entertaining personal friends or business acquaintances where there’s no business obligation to entertain them.
Reciprocal entertaining between business acquaintances, even though some business topic happens to be discussed, may be really for social and not business reasons and, if so, this expense is not allowable.
20.7
It’s for this reason that the expense of entertaining colleagues, that’s, other employees of the same organisation, is not normally allowed. A PAYE Settlement Agreement should be completed to account for any tax and National Insurance contributions due.
20.8
Section 356
Where an employee meets entertaining expenses from an inclusive salary or from a round sum allowance paid by the employer to cover expenditure besides entertaining, the disallowance is made in calculating the employee’s tax liability.
20.9
Where entertaining expenditure is not allowable the disallowance extends also to expenditure incidental to the entertainment. Therefore, the cost of the employee’s own meal, of a taxi to and from a restaurant, or the cost of hiring a room for entertaining, would all be treated for tax purposes in the same way as the cost of the entertaining itself.
Business entertaining and gifts
20.10
Section 356(3)
Entertaining includes hospitality of any kind and also expenditure on business gifts other than free samples of the trader’s own products distributed with the aim of advertising to the general public. There is, however, a limited exception for gifts which incorporate a evident advertisement for the donor.
Section 358(3)
This exception does not extend to gifts of food, drink, tobacco, or vouchers exchangeable for goods. It’s subject to the condition that the aggregate cost to the donor of the gifts does not exceed £50 a year in the case of any one recipient.
Employees of concerns not carrying on a trade
20.11
Section 336
Employees of non-trading concerns such as the Civil Service and the Armed Forces are allowed an exemption for entertainment expenses which are incurred wholly, exclusively and necessarily in the performance of their duties.
Keeping records
20.12
Employees who believe they’re allowed an exemption for entertaining expenses should be able to support the exemption with reasonable records of the amounts spent on particular occasions, the nature of the entertainment, the persons entertained and the reason for the entertaining.