The rules for allowable business expenses are generally similar for limited and unlimited companies, with some subtle exceptions. Where there are differences  – these are identified in the guide below.

Entertainment Business Entertainment

  • NOT ALLOWABLE!
  • HMRC will not allow any cost relating to client or supplier entertainment as a tax deductible expense as the business is expecting to ‘profit’ out of the relationship. Though they will be happy to tax you on the future profits you may generate!
  • VAT cannot be recovered on business entertaining so the expense must be recorded gross in your accounts
  • The expense can still be paid for by the business and charged to your to your profit and loss account for management accounting purposes but will be disallowed in your end of year tax return

Staff Entertainment

  • Reasonable costs of entertaining staff ARE allowed as HMRC consider this to be part of the cost of managing and motivating staff
  • Costs might include a meal out to celebrate a team success, summer BBQ’s or Christmas parties
  • Staff must be employed staff on payroll, not subcontractors who are really suppliers and fall under business entertainment
  • The company is allowed to spend £150 per employee (including VAT), per year, on staff entertainment – this might be a summer barbecue or a Christmas party
  • The event must be open to all staff and must be a staff event. If the event is for clients, but staff attend, then it is considered to be Business Entertainment
  • Any money the company spends inviting partners or spouses of employees is allowed for tax purposes – i.e any additional marketing, print or postage costs. The cost of inviting partners and spouses must be included in the total expenditure for the party, including the non-employee guests, and must still amount to £150 or less per employee attending for it to be tax free for your employees.
  • Beware – any money spent on partners or spouses is viewed as entertainment that means the VAT on that proportion of expenditure cannot be claimed back. You will need to show the split between employees and their non-employee guests when you post the costs to your accounts.
  • Even a small company with just two or three employees are able to claim up to £150 per employee for any staff party
  • If the entertainment is only for the partners or directors of the business (and not employees) then the VAT incurred is not allowed and cannot be recovered in your VAT return. But, if they attend a party with regular employees, then the VAT on the spend is recoverable.
  • Be careful not exceed the £150 per person limit as this will mean the entire amount is disallowed, not just the excess over £150.
  • Where tax arises, the employer may set up a PAYE settlement agreement (PSA) to relieve the employee from any liability.

 


Third Party Staff Entertainment

  • Where someone other than the employer entertains an employee, including hospitality of any kind, there will be no taxable benefit if all of the following conditions are met:- the entertaining was not procured by the employer, or anyone connected with the employer;- the person providing the entertainment is not connected with the employer; and – the hospitality is not provided in return for any services of the employee.
  • If these conditions are not met , a taxable benefit in kind occurs.

 

Top Tips We recommend you set up separate business and staff entertainment codes in your chart of accounts and keep the costs ring-fenced. This will help you keep track of the spends and ensure the right costs are allowed and disallowed at the year end.

If staff are ‘entertained’ by a third party – this should also be logged on the gifts register. See: Gifts

Eyesight tests and glasses

  • This is a tax deductible expense where the employee needs to use a computer or VDU to perform their duties.
  • You can claim for the eye test and the lenses if they are prescribed for computer work, but not the frames.
We hope you find this series on expenses helpful. Please take a moment to check out our other articles.    

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