Client and Supplier Entertainment – Is It Tax Deductible?

By Kate | August 4, 2023

Entertaining clients and suppliers is an important part of many companies’ marketing budgets, in order to maintain and grow business relationships. However, the tax rules on business entertainment are frequently misunderstood. In most cases, these expenses, along with business gifts, are not tax deductible, so you must add them back to Corporation Tax computations – but there are a few limited exceptions. Continue reading to find out more, or get in touch today for professional advice. You can also see more on staff entertainment taxes here.

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What is Business “Entertainment”?

Business entertainment is the offering of complimentary or discounted hospitality and events, without any payment from the client or supplier. The scope is broad, but examples could include:

Taking a supplier for breakfast, lunch, or dinner
Treating clients to a golf or race day
Business invitations to a box at a football or rugby match

Hospitality covers food, drinks, and/or comparable benefits provided – subsidised hospitality and entertainment are also covered, where the costs incurred by the client or supplier do not fully cover the costs of the event.

Is Business Entertainment an Allowable Deduction?

In most cases, HMRC does not classify business entertainment as a tax-allowable expense – though it’s still recommended to settle these costs (as long as they’re genuine, and not excessive) through your business bank account. For instance, if you cover the expenses from your personal bank account, your overall tax liability could increase.

So, is client and supplier entertainment worth it? There are some exceptions to the rule when it comes to tax relief on business entertainment – from staff entertainment exemptions (not allowances) and following normal courses of trade, to contractual obligations and small advert-bearing gifts. And, even if the entertainment isn’t tax deductible, many businesses see entertainment as an expense worth paying in order to nurture relationships and secure new contracts.

Exception One: Staff Entertainment

The first exception to the rule is staff entertainment – as long as the expenses are incurred wholly and exclusively for business purposes, and they aren’t incidental to the client or supplier entertainment. For example, clients may attend a deductible staff Christmas party, but if a company takes suppliers to an event such as a sports match where employees may also be present, this doesn’t guarantee a deduction. Plus, unless specific exemptions apply, employees may be subject to a benefit-in-kind (BiK) charge, with tax and NI implications.

You have a max budget of £150 (inclusive of VAT) to spend per attendee – make sure you don’t overspend, as this will invalidate the exemption, and make it a benefit-in-kind. This budget can be extended to cover not only employees but also partners or spouses. To calculate the total expenditure per head, add up all the party costs, including transportation and accommodation, and then divide it by the number of attendees. Remember to keep receipts for all the expenses you intend to claim.

Keep in mind that the £150 spend is classified as an exemption rather than an allowance. To be eligible for a tax claim, you must actually spend the money on qualifying expenses. If the exemption amount is left unused, it will not carry over to future periods. For instance, if you are a sole director of a company but choose not to have a festive dinner alone, you cannot claim the £150 in cash or cash substitutes like shopping vouchers.

Exception Two: Hospitality Businesses

The disallowance rule does not impact businesses primarily engaged in providing hospitality services, e.g., restaurants and events management companies. Therefore, deductions are permitted for the costs incurred in offering hospitality, provided they are entirely and exclusively for the business’s purposes.

Exception Three: Contractual Obligation to Entertain

When entertainment is provided under a contractual agreement, it is not considered business entertainment, and the associated cost can be deducted. A typical instance is when hospitality is offered as part of a package deal. However, it is essential for the business to demonstrate that they have received a full return for the provided entertainment.

Exception Four: Small Gifts with Adverts

Generally, gifts to clients or suppliers are considered as business entertainment, making the costs non-deductible. However, there is an exception for gifts that cost no more than £50 per year, per recipient, provided they display a prominent business advert, e.g., a notepad or desk ornament. As long as the criteria are met, these gifts can be claimed as a deduction when calculating taxable profits.

Need Advice on Business Entertainment Expenses?

If you need more information on client and supplier entertainment expenses, our friendly and professional accountants are here to help. We can also give advice to your business on Corporation Tax and VAT Returns, and assist with filing. Contact our team today, either through our online form, by calling 01743 562430, or by emailing hello@mercianaccountants.co.uk.