Staff and Client Entertainment Expenses: What Can You Claim?

Entertaining staff or clients has multiple benefits. Rewarding employees for hard work builds loyalty and morale, while spending time with clients helps strengthen relationships and differentiate your business from competitors.

However, it’s important to understand what qualifies as an entertainment expense and what tax relief or VAT can be claimed to ensure budgets are maintained and reporting remains accurate.

What Counts as an Entertainment Expense?

According to HMRC, entertainment includes eating, drinking, and other hospitality such as accommodation or event tickets. Key types include:

• Business entertainment of clients – e.g., discussing a particular business project or forming/maintaining a business connection.

• Non-business entertainment of clients – e.g., entertaining a business acquaintance for social reasons.

What to report and pay depends on the type of entertainment, who arranges it, and who attends. Staff entertainment has its own specific rules.

Client Entertainment

Client or business entertaining refers to expenses incurred when hosting existing clients, potential clients, or anyone who is not an employee.

• Entertainment must be provided for free to count as client entertaining.

• Most client entertainment costs are not tax-deductible, and VAT is generally not recoverable.

• However, there are ways to make client entertainment more tax-efficient.

Tax Relief on Client Entertaining

• Always pay through the business rather than personal accounts.

• While the expense is not allowable for Corporation Tax, paying via the business avoids personal income tax on funds withdrawn to cover costs.

Reclaiming VAT on Overseas Client Entertaining

• VAT cannot usually be reclaimed for client entertainment in the UK.

• VAT may be recoverable for overseas customers if the entertainment is reasonable in scale and business-related.

• Hospitality provided just to be polite or improve relationships does not count as business expenditure.

• Costs for entertaining overseas suppliers or business contacts cannot be claimed.

HMRC guidance on client entertainment VAT provides detailed rules.

Staff Entertainment

Staff entertainment rules differ significantly from client entertainment.

Who Qualifies as an Employee?

• The person must be on the business payroll and paid a salary.

• Previous employees, interviewees, subcontractors, or non-working shareholders do not qualify.

• Sole traders or partners in an LLP/partnership are not considered employees for tax purposes.

Tax Relief for Staff Entertaining

• Generally considered an allowable business expense and tax-deductible.

• Allowable costs include food, drink, entertainment, venue hire, transport, and overnight accommodation.

• VAT-registered businesses can reclaim VAT on allowable staff entertaining.

• Costs must be reasonable and genuinely for business purposes.

Note: Employees are usually liable for Income Tax on the value of staff benefits. Employers can avoid this by staying within the Annual Party Exemption.

The Annual Party Exemption

• Expenditure up to £150 per head per tax year on annual staff events (e.g., Christmas or summer party) is exempt from Income Tax and National Insurance.

• The exemption can cover multiple events as long as the total per head does not exceed £150.

• Events must be open to all employees.

• If the cost exceeds £150 per head, the exemption does not apply.

Director-Only Entertainment

• If your business has only directors and no employees, entertainment costs are not tax-deductible, and VAT cannot be reclaimed.

• Exception: if the entertainment occurs during a business trip, VAT on travel, meals, and accommodation can be reclaimed, provided the trip would have occurred anyway.

Tips to Make Entertainment More Tax-Efficient

• Keep entertainment reasonable in scale and purpose.

• Document purpose, attendees, date, and cost.

• Ensure annual party costs do not exceed £150 per head.

• Pay through the business account, not personal accounts.

For practical guidance on managing staff or client expenses, see our Bookkeeping and VAT Services page.

Conclusion:

The rules around staff and client entertainment are complex, but understanding the distinctions and applying them carefully can make your spending more tax-efficient. Always keep detailed records and follow HMRC guidance for compliance.