The VAT rules around food, drink, travel and entertainment are complex. We’ve produced this guide to help you work out whether or not you can reclaim VAT on certain expenses, and whether or not they qualify for relief from Corporation Tax.
The general rule is that you get tax relief on staff subsistence and entertainment. You do not get tax relief on entertaining anyone else, even if it is for business.
There are a number of exceptions and conditions to the general rule, and we have set them out below. There are some examples at the end of this guide to help you work out the correct treatment.
The rules for reclaiming input VAT and relief from Corporation Tax are sometimes different. You might be able to reclaim VAT on an expense but it is not allowable for Corporation Tax. Likewise, you might not be able to reclaim input VAT but still be entitled to a Corporation Tax deduction. In this guide, where we have said that relief is available, we mean that input VAT is reclaimable and that Corporation Tax relief is available.
Entertainment
Entertainment is defined as hospitality of any kind. This might include accommodation, theatre or sporting tickets, entry into venues, meals out at restaurants, or the provision of other food and drink.
Entertaining employees is allowable. Entertaining anyone other than employees is not allowable, even if it is for business.
Subsistence
Subsistence is generally food drink and travel incurred by employees or subcontractors in the course of performing their duties away from their usual place of work.
If subsistence expenditure is incidental to entertainment, then that expenditure is also treated as entertainment and availability of relief will follow the rules for the related entertainment.
For example, if an employee based in Glasgow stays in a hotel overnight because they are visiting a client at their London office to negotiate a contract, this is subsistence.
If the same employee is invited to the races at Ascot and the company decides to book them into a hotel, then this is entertainment-related expenditure and is disallowed. The reason for this is that the purpose of the trip is entertainment, even if there will be business discussions at the event.
Examples
| Scenario | Subsistence or entertainment | Tax relief available | Why? |
|---|---|---|---|
| A business pays for an employee’s hotel and meals when they are working away from home overnight | Subsistence | Yes | Subsistence incurred in the performance of the employee’s duties |
| A business organises a summer barbeque for all its staff | Entertainment | Yes | Staff entertainment is allowable |
| A business pays for its shareholders to stay in a hotel the night before a board meeting | Subsistence | No | Subsistence must be incurred by employees or subcontractors |
| A business pays for a golf away day and sends 2 employees with 2 of their clients | Entertainment | No | Relief is not available where an employee is a host to non-employees |
| A business pays for a golf away day and sends their 2 employees with the highest sales figures and allows them to take a friend each | Entertainment | Partial | Relief is available on the portion attributable to the employees only as the purpose is to entertain them and not the guests. |
| A business buys tea, coffee and biscuits and makes them available to all staff in the office | Entertainment | Yes | Available to all employees |
| The directors of a business go out for a 3-course lunch to discuss strategy | Entertainment | No | Employee entertainment that is only open to directors is not allowable |
| The director buys all the staff in the office a coffee | Entertainment | Yes | Available to all employees |
For more information on subsistence, see VAT Notice 700, and for entertainment, see VAT Notice 700/65, or contact us directly and we can help.
Overseas clients
VAT
The rules are different for entertaining clients based overseas, and VAT on entertaining an overseas client is reclaimable. A private use charge will apply unless there is a strict business purpose, which generally means that the entertainment must be essential, such as providing tea and coffee during a meeting to allow it to proceed uninterrupted. For more information on entertaining overseas customers, see VAT Notice 700/65 para 2.6.
Corporation Tax
Entertaining overseas clients is not allowable for Corporation Tax.
Benefits-in-kind
Where an employee receives a non-cash benefit from their employment, they must be taxed on the value of the benefit-in-kind as earnings based on the cost to the employer, unless it is covered by an exemption. The cash equivalent (usually the cost to the employer) of the benefit-in-kind is added to the employee’s other income and taxed through payroll.
Entertainment enjoyed by staff is usually a benefit-in-kind which needs to be reported to HMRC, unless is qualifies for one of the below exemptions.
Trivial benefits
Most benefits received by an employee with a value under £50 (including VAT) are covered by the trivial benefits exemption, as long as the benefits are not in cash and aren’t as a reward for their work. Benefits that fall in to this exemption might include teas and coffees provided in the office or flowers sent to an employee for their birthday.
Directors are limited to 6 trivial benefits per tax year not exceeding £50 (including VAT) each. There are no limits for non-directors.
Annual exemption for social events
There is an annual exemption for staff entertainment of £150 per person (including VAT), which does not need to be reported to HMRC. This applies to annual parties or functions, and the total cost of all events during the year can’t exceed the threshold, otherwise the whole amount is taxable as a benefit-in-kind.
More information
The responsibility is yours as an employer to operate payroll correctly, and to make sure that any benefits-in-kind are taxed correctly. If you’re not sure whether or not you need to report staff entertainment as a benefit-in-kind, please let us know. You can also find more information about benefits-in-kind here.
