Entertainment expenses for accounting and taxes

In almost every business there comes a time when those within the company ask themselves how to file business entertainment expenses. Regardless of whether you’re a huge multinational, a small company, or a freelancer, the likes of business meals are often a very important aspect of the general business activities. Occasions like this allow you to get together with customers, business partners, and even suppliers.

According to HRMC, entertainment refers to activities around eating, drinking and other forms of hospitality. HMRC also distinguish between business entertainment and non-business entertainment. Business entertainment will involve engaging in discussion with partners regarding current or potential projects. It may also be to maintain a current client relationship or create a new one. Non-business entertainment means playing host to a business partner or client but for reasons that are social and not company related. 

The question of what to report and pay differs significantly depending on the type of entertainment, as well as who has arranged and who is then paying for it. Here is a short list of all the possible permutations and how each individual situation should be dealt with:

For the business entertainment of clients you are required to report the cost on form P11D and you are not required to pay any tax or National Insurance. This is the case no matter if 1) you have arranged and paid for the entertainment directly, 2) you are paying a supplier for the entertainment organised by an employee, or 3) you are reimbursing an employee for entertainment expenses made by them.

(Some business entertainment expenses are subject to exemptions meaning that they do not to be included in your end-of-year reports. You can qualify for one of these exemptions if you are paying an expenses flat rate to your employee as part of their general salary or if you are paying back the employee’s actual costs.)

A non-business entertainment that you arrange and pay for must be reported on form P11D and then you pay Class 1A National Insurance based on the value of the benefit.

A non-business entertainment that an employee arranges and you pay for must also be reported on form P11D, and then through payroll you add the full cost to the employee’s earnings and deduct Class 1 National Insurance but not PAYE. 

A non-business entertainment that an employee arranges and pays for (but which you then reimburse) should be added to the earnings of the employee in question, followed by you paying PAYE and Class 1 National Insurance through payroll.

On the P11D form there is an entertainment-related box which you should either tick or put a cross in. This is in order that the HMRC know whether to allow your employee to claim a tax deduction for the entertainment expenses provided by you. Place a tick in the box if the cost of the entertainment will be disallowed in your business’ calculations for that year/quarter. Or put a cross in the box if it will not be disallowed.

An expense receipt is a document containing details on hospitality expenses that have been carried out for business purposes, e.g. a business meal. Technically speaking, entertainment expense receipts belong under the category of supporting documents, which are normally provided by an external party, in this case, the restaurant.

When it comes to expense receipts it is often the case that tax auditors will examine very carefully whether such an event was actually for private purposes or business purposes. This is because it can sometimes be quite difficult to differentiate between the two, particularly when you compare it to other possible business-related expenses. Since it is the case that client relationships are often fostered and maintained over dinners and such, then it is inevitable that this may sometimes lead to a certain degree of overlapping. That’s why it is of even greater importance to make the reason for the occasion as clear and as plausible as possible.

When filing such an entertainment expense, it is also crucial that you differentiate between a client event (hosting) and one organised for employees (staff entertainment).Take the example of a party: if it is just for you and your employees then this will be fully tax deductible and the VAT can also be recovered. However it is important to remember that there is a limit of £150 per employee, and this is then seen as a benefit in kind, meaning that if you do happen to spend in excess of the £150 cap then everything above this will be taxable. Instead of having their staff subject to tax on this, a lot of employers choose to look after this in the form of a PAYE settlement agreement. This £150 limit per employee is the limit for one calendar year, even if you host multiple events. It is also a requirement that all employees are invited to this event, i.e. that it is not an occasion that is exclusive to only some members of staff.

It is very important that you have the correct and relevant records of all expenses and benefits provided to your employees. HMRC have the right to request to see proof of how you accounted for the expenses compiled in your end of year books. Required is the date and details  of every expense and benefit, as well as any supporting information needed to calculate the amounts put on the end of year forms. You also need to include any payment your employee contributes to an expense/benefit.

With matters like this it is the P11D form that is important to business owners. This is the form used to register the expenses, including entertainment expenses, of employees and those of a limited company director. The form needs to be submitted to HRMC at the end of each tax year.

As of April 2016, many expenses no longer need to be included in the P11D form. However this is not the case with business entertainment expenses.

Additionally, businesses are required to have a system of registering and confirming employee expense claims. For this reason, it is very important to hold onto all receipts and completed expense forms.

When filing business entertainment expenses there are a couple more things to take note of:

• The receipt should always be printed – handwritten receipts and confirmations should generally be avoided.
• If you are unsure whether the expense receipt is enough then you may want to make sure you archive additional proof that the event took place. This might include emails that were sent to participants or even the itinerary for the day of the event.
• In principle, the occasion and associated costs should be roughly in proportion to one another. This means that costs should not be too excessive so that the auditor sees the amount spent as reasonable.
• It is always recommendable that you sign each expense receipt.

Tips are also a very important part of business meals and entertainment expenses, and, therefore, should not be forgotten when it comes to the expense receipt. If you are a business that often entertains clients, then the money spent on tips can really begin to add up. It can often happen that the bill is paid with credit card and then the tip in cash. In this case, it is possible to write up a supporting document to take care of this additional aspect. It’s a good idea to write the amount of the tip on the receipt and get the waiter or waitress in question to sign it, ensuring as well that the server’s name is also on the receipt. Please note the legal disclaimer relating to this article.