Your limited company can pay for both staff and client entertainment, but the tax treatment differs significantly.
You can normally offset a staff Christmas party, summer barbecue or team event against your company’s Corporation Tax bill (subject to strict conditions).
However, if you take a client out for dinner, the company can pay the bill, but in most cases the cost is not deductible for Corporation Tax.
Remember – “the company paid for it” does not necessarily mean “the company gets tax relief on it”.
Here are the main rules that apply to staff events, client entertaining, and the £150 annual function exemption.
Staff entertainment
Staff entertaining is normally an allowable expense where it is provided for employees and there is a genuine business purpose behind it.
This could include:
- A Christmas party.
- A summer barbecue.
- A staff dinner.
- A team-building event.
- A staff outing or celebration.
HMRC treats staff entertaining differently from entertaining customers and other business contacts. You can normally deduct the cost when calculating the company’s taxable profit, provided you meet the usual business-purpose rules.
You can read HMRC’s guidance on staff entertaining here.
The £150 annual function exemption
Whether you like it or not, the Christmas party question comes round every year.
A limited company can hold an annual party or similar function for its employees without creating a taxable benefit, provided it meets the qualifying conditions.
The event must:
- Be annual, such as a Christmas party or summer event.
- Be open to all employees, or all employees at a particular location where the company has more than one location.
- Cost no more than £150 per head, including VAT.
The £150 figure is not an allowance, so if a company event costs £151 per head, you don’t simply pay tax on the extra £1. The entire claim will then fall outside the exemption.
You can read the official explanation in HMRC’s social functions and parties guidance.
How do you calculate the cost per head?
Take the total cost of the function and divide it by the total number of people who attend.
The total includes VAT and can also include transport or overnight accommodation provided as part of the event.
So, if your company spends £1,200 on an annual event attended by eight people, the cost is £150 per head.
If the same event costs £1,208, the cost rises to £151 per head, and you lose the entire exemption.
What if you hold more than one event?
You can hold more than one annual function during the year.
If the combined cost is no more than £150 per head, all of the qualifying events can fall within the exemption.
If the combined total exceeds £150, you can choose the combination of qualifying annual events which makes best use of the exemption.
For example, if a summer event costs £60 per head and a Christmas party costs £100, you cannot simply treat the first £150 as exempt.
One entire event (the £100 one in this case) can use the exemption, but the other one (£60) becomes taxable.
What about limited company directors
Directors are also company employees, so a director can attend a qualifying annual event.
This is particularly useful for small owner-managed companies where the director may be one of only one or two employees.
However, the event must still meet the exemption conditions. Simply taking yourself out for dinner and labelling it a company Christmas party does not automatically make the cost tax-deductible!
Can you invite your spouse or partner?
Yes, partners and family members can also attend a qualifying annual function.
The £150 test is applied per attendee, so their attendance is included when working out the cost per head.
For example, if a director and their spouse attend an annual event costing the company £250 in total, the cost is £125 per head.
If the exemption applies, there is no taxable benefit for the director in respect of either attendance.
What happens if you exceed the £150 limit?
If the event does not qualify for the exemption, the employee can be taxed on the full cost of their place and the cost of any guest they brought with them.
The company will usually need to report the benefit and pay Class 1A National Insurance on the value of the benefit.
Again, this is why you need to be very careful when booking an annual event, as a small overspend can completely change the tax treatment of the entire function.
Virtual parties
Virtual annual events can also qualify for the exemption, as HMRC included them in its guidance during the COVID pandemic.
This has become more common as teams increasingly work remotely, and an annual function delivered online can meet the exemption (subject to the normal conditions).
The event has to be available to all relevant employees, as it is for non-virtual events, and can’t be simply an informal reimbursement of personal food or drink.
Client entertainment
Client entertainment is treated very differently from staff entertaining.
Your company can pay to entertain customers, potential customers, suppliers, or other business contacts.
Some typical examples include:
- Taking a client out for lunch or dinner.
- Hospitality at a sporting event.
- Tickets to a concert or show.
- Drinks provided to clients.
- Corporate hospitality packages.
Even though entertaining clients may have a genuine business benefit, these costs are normally specifically disallowed for Corporation Tax purposes.
Practically speaking, you record entertainment expenses in your accounting system, and your accountant will add them back when calculating taxable profits at year-end.
Read more in BIM45000.
What about a business lunch with a client?
If you invite a client to lunch and your company picks up the bill, this is normally classed as business entertainment and therefore disallowed for Corporation Tax.
The same principle applies if you meet a prospective customer for dinner or entertain a supplier.
This is different from buying yourself a meal while you’re away on a genuine business trip. You can usually treat that as a travel and subsistence expense rather than client entertainment.
For more on travel costs, see our guide to travel expenses for limited company directors.
Can you reclaim VAT on staff entertainment?
If your company is VAT registered, it can normally reclaim the VAT on genuine staff entertainment, including parties, team outings and similar events.
There is one awkward exception for very small companies. If the event is only for directors or partners, HMRC will usually not allow the VAT to be reclaimed because it does not regard the entertainment as being provided for a business purpose.
That restriction normally disappears where directors attend a wider staff event with other employees.
Read more in this HMRC Business entertainment VAT notice.
Can you reclaim VAT on client entertainment?
No, in almost all cases, you cannot reclaim VAT when entertaining business clients.
If an event includes both employees and non-employees, you may need to apportion the VAT and only recover the part relating to qualifying staff entertainment.
Keep a clear record of who attended an event, particularly when one bill covers costs for both employees and clients.
What about staff and clients at the same event?
You need to take even more care where staff and clients attend the same event.
If employees attend primarily to host clients, their entertainment can be treated as incidental to the client entertainment. In such situations, the normal staff entertainment exception may not apply to the whole cost.
A genuine staff event where some non-employees have been invited can also create some tax headaches – particularly for VAT – where the employee element may need to be separated from the cost relating to the guests.
If you’re arranging a larger event, you may need to provide your accountant with a few more details about what the event was for and who attended, rather than entering ‘staff entertainment’ into FreeAgent!
Need more advice? Get in touch.
Entertainment expenses are a great example of how the accounting and tax treatment of a business cost can differ, and how complicated the rules can be.
If you are unsure whether a company event, client meal, or other entertainment cost is allowable, the Integro team can help you work out how to treat it.
Click here to get in touch with the Integro team.
You can also read our complete guide to limited company expenses for more information on the costs your company can claim.
