EIM32600 - Other expenses: entertainment expenses: disallowance under section 356 ITEPA 2003: employers' profits exempt from tax under the terms of a double taxation agreement
Section 357(2) ITEPA 2003
The prohibition in section 356 ITEPA 2003 on deducting entertainment expenses does not apply if the 3 conditions in EIM32585 are satisfied. The third condition comes from section 357(2), which reads as follows:
“…..the deduction of the amount falls to be disallowed under Section 45 or 867 ITTOIA 2005 or under Section 577 of ICTA in calculating the employer’s profits from the trade, profession or vocation in question for the purposes of the Taxes Acts (or it would do so apart from …any relief applying in respect of those profits).”
The words in brackets mean that if the profits of a business would have been taxed in the UK but for the terms of a double taxation agreement the condition in section 357(2) can be regarded as satisfied.
The employees of such a business are therefore protected from section 356 even though the employer has paid no UK tax on their trading profits. Entertainment expenses which are paid out of money supplied by, or reimbursed by, the employer exclusively for that purpose will therefore qualify for a deduction if they satisfy the general expenses rule in section 336 (see EIM32615 onwards). But section 356 still prevents a deduction for entertainment expenses paid out of the employee’s inclusive salary.