Staff and Client Entertainment: What Can You Claim?

According to HMRC, entertainment covers a range of activities such as providing food, drinks, hospitality, accommodation, or event tickets. Entertainment can be categorised into:

• Business entertainment: For example, meeting clients to discuss a project or strengthen a professional relationship.

• Non-business entertainment: For example, hosting a social outing with a business acquaintance without a work-related agenda.

Entertainment is defined as hospitality of any kind, the following are examples:

• provision of food and drink (including the office fruit bowl and beer fridge)

• provision of accommodation (such as in hotels)

• provision of theatre and concert tickets

• entry to sporting events and facilities

• entry to clubs and nightclubs

• use of capital assets such as yachts and aircraft for the purpose of entertaining

What needs to be reported and paid varies based on the type of entertainment, who organised it, and who participated. Additionally, staff entertainment has its own specific guidelines that must be followed.

Business or client entertainment

In the UK, client entertainment typically includes activities like meals, drinks, event tickets, or hospitality provided to clients to build or maintain business relationships.

However, it’s important to note that the cost of client entertainment is generally not allowable as a deduction for corporation tax purposes. This means businesses cannot claim tax relief on these expenses, even if the entertainment is directly related to the business.

For VAT, input tax on client entertainment expenses is also not reclaimable unless the client is an overseas customer and specific conditions are met.

Businesses must carefully distinguish between client and staff entertainment, as staff entertainment has different tax treatments for both corporation tax and VAT. Accurate record-keeping and compliance with HMRC guidelines are essential to avoid penalties and ensure proper reporting.

Business entertainment provided to overseas customers

The term ‘overseas customer’ means any customer not ordinarily resident or carrying on a business in the UK, including the Isle of Man.

VAT incurred on the entertainment of overseas customers may be recoverable when incurred for the purpose of the business if it’s reasonable in scale and character. However, there will be an output tax charge if there is a ‘private benefit’ to the individual enjoying the entertainment which will cancel out any recoverable input tax.

There is usually a private benefit when business entertainment is provided. However, in cases where the expenditure is necessary and for strict business purposes the private use may be ignored. Hospitality provided because it would be polite, because it’s expected, or because it would improve relationships is not for strict business purposes.

Staff entertainment

In the UK, staff entertainment, such as team-building events, parties, or meals, can often qualify as an allowable business expense for corporation tax purposes, provided it is intended to reward or motivate employees.

VAT on staff entertainment is generally reclaimable if the event is solely for employees and not extended to clients, business partners or contractors.

Additionally, under the £150 annual exemption for staff parties or events, businesses can provide tax-free benefits to employees if the event is open to all staff, costs no more than £150 per person (inclusive of VAT), and is considered a social event rather than a reward. If the cost exceeds £150 per person, the entire amount becomes taxable as a benefit-in-kind, and it must be reported on a P11D or handled via a PAYE Settlement Agreement (PSA).

Events for directors or shareholders who are not employees may not qualify for these exemptions and if you’re a sole trader or a partner in an LLP or partnership you also don’t count as an employee as there’s no legal difference between you and the business. Clear record-keeping is crucial to ensure compliance with HMRC guidelines.

The annual party exemption

The £150 annual exemption allows UK businesses to provide tax-free social events or parties for employees, as long as specific conditions are met. The exemption applies if the event is available to all employees (or all employees at a specific location), and the total cost does not exceed £150 per person per tax year, including VAT. The cost must include all associated expenses, such as food, drinks, accommodation, and transport. Importantly, the £150 limit is not an allowance—it’s a threshold. If the cost per person exceeds £150, the entire amount becomes taxable as a benefit-in-kind and must be reported on a P11D form or covered under a PAYE Settlement Agreement (PSA). The exemption can apply to multiple events within a tax year, provided the combined cost does not exceed £150 per person. This rule provides a valuable way for employers to host events and reward staff without triggering additional tax liabilities for employees.

P11D form

A P11D form is used by UK employers to report benefits and expenses provided to employees or directors that are not included in their wages, such as company cars, private medical insurance, or reimbursed expenses.

Employers must complete a P11D for each relevant employee and submit it to HMRC by 6th July following the end of the tax year, with a copy also provided to the employee.

Benefits reported on the P11D are subject to both Class 1A National Insurance contributions (NICs), paid by the employer, and income tax, which is paid by the employee, usually through an adjustment to their PAYE tax code.

Some benefits can be excluded from P11D reporting if they are covered under a PAYE Settlement Agreement (PSA) or fall within certain exemptions, such as the £150 annual party allowance.

Accurate reporting is crucial to avoid penalties for late or incorrect submissions, and keeping detailed records of all expenses and benefits is essential for compliance.

PAYE Settlement Agreements

If you provide benefits to your staff that you don’t want them to incur a personal tax liability on, you can set up a PAYE Settlement Agreement (PSA) with HMRC to pay the tax on their behalf.

A PSA allows you to cover the tax and National Insurance for certain benefits, such as an office beer fridge, a fruit bowl, or other minor or irregular perks, without having to report these individually on your employees’ P11Ds. This arrangement ensures your staff don’t face additional tax liabilities while simplifying the process for you as an employer.

To set up a PSA, you’ll need to agree with HMRC on the benefits it will cover. Once approved, you calculate the total tax and Class 1B National Insurance due and make a single annual payment. This is a practical solution for managing small, shared benefits without creating extra reporting obligations for your team.

Here are some useful HMRC links to get you started:

• https://www.gov.uk/expenses-and-benefits-entertainment

• https://www.gov.uk/guidance/business-entertainment-and-vat-notice-70065

• https://www.gov.uk/tax-company-benefits

• https://www.gov.uk/expenses-benefits-social-functions-parties

• https://www.gov.uk/paye-settlement-agreements

If you don’t have time to dive into the details or need tailored advice, give our expert team a call. We’re here to help you understand the rules, save on taxes and stay compliant with HMRC.