Let us say that you are considering putting on a customer event where food and drink will be provided. Is this marketing or entertaining? Well it depends!
A few definitions
Business marketing, promotion, hospitality and entertaining costs are all part of a spectrum of customer and client costs.
Entertaining is not deductible for Corporation Tax and Income Tax purposes, whereas modest hospitality probably is. However, business marketing is tax deductible and also so is general business promotion.
Business entertainment includes any form of hospitality, including food and drink provided in the course of a business. However, there are minor exceptions to this rule.
The purpose of the food and drink and also the amount and type of food and drink can be critical in deciding if the business expense incurred is entertaining or marketing/promotion.
The level of food and drink
If you provide light refreshments, e.g. tea, coffee, soft drinks etc and a few nibbles, possibly a sandwich, that is incidental to a meeting then these costs should be tax deductible. If the primary purpose of the meeting or event is to discuss business or promote your products and services, and the food and drink provided are modest, then this is not classed as entertaining.
If alcohol and/or a substantial meal is provided at the event then it would be deemed as business entertaining.
You may also run an event for customers and clients, at say lunch time or that runs into the evening. There is a concession that permits the food and drink to be included as part of the tax-deductible event costs. The tax rules are relaxed where it is impractical to stop the meeting or event part way through for the guests to go out to find food and drink.
However, if the food and drink is more elaborate and it becomes the main event or reason for the expenditure then this is business entertaining and not tax deductible. In addition, any VAT included within the costs cannot be recovered if your business is VAT registered.
Business entertainment
Tax law defines business entertainment as “hospitality of any kind” and which includes amounts spent “providing anything incidental to the provision of entertainment.”
If your business decides to wine and dine the owners and managers of a key client or a possible new customer then this is clearly entertainment. If you agree to pay for hotels for the guests then this is part of the cost of entertaining. Any business discussed would be incidental to the main reason of the entertaining. Similarly, even paying for taxis from the restaurant back to home or a hotel would be part of the entertaining.
As such, you should record the hotels and taxis are part of the business entertainment in your business records or at least show that they are linked to the entertaining e.g. by including all related costs in the entertaining nominal ledger or column in your Excel based cashbook.
It would be wrong to record the cost of the hotels and taxis in your accounting records as general [staff] business travel, which would of course be tax deductible.
Not business entertainment
If some food and drink is provided at a marketing event or service / product launch, would that expense be entertainment? What about if taxis are provided for some of the more senior attendees?
In this situation, HMRC should accept for a genuine business event, as described above, that all the costs of the event are fully tax deductible. This would include the venue hire, modest food and drink, including the taxis home in the evening.
If a free bar was provided then this part of the cost should be treated as business entertaining. The HMRC Manual (BIM45050) confirms this.
However, if after the event a lavish sit-down meal with alcoholic drink is provided then there is duality of purpose in the overall event. The cost of the main promotional event, with its associated marketing and advertising, should be tax deductible, but the entertainment thereafter is not tax deductible.
The costs of the taxis home after the event would also be treated separately. In this case there is a dual of purpose to the taxis; partly for the main promotional event and part for the entertaining. Tax law says in this case that it is not possible to allocate the taxi home to either part of the event.
We have to fall back on what the law says. The general rule for a business to claim costs for tax purposes is that they must have been incurred “wholly and exclusively for the purpose of the trade”. Where there is duality of purpose, by definition, the cost cannot have been incurred wholly for the main promotional event. You cannot claim that part of the taxi cost, e.g. the first 5 miles is for business event, and the next 6 miles is for entertaining.
Recordkeeping
For the reasons noted above, appropriate descriptions and analysis in your business accounting records is important.
You cannot assume that your accountant will spot or sort out the tax treatment at the accounting year end, especially if you’ve ‘sprayed’ the event costs over multiple nominal ledger codes or cash book columns.
Furthermore, it is not the job of your external accountant to rummage around your accounting records looking for misallocated costs or trying to link entertainment costs including amongst other genuine business costs.
I would therefore always suggest that in these cases you clearly highlight the nature of the expense and not just record hotel, taxi, food and drink in your records. Without more details on each of these costs, it is not possible to correctly ascertain what is business promotion and what is entertainment.
It will be your business that suffers when HMRC comes along and asks questions and issues back dated tax assessment, with possible interest, surcharges and penalties.
Whilst I often say to clients that I do my best to prepare their Accounts and Tax Returns in accordance with the law, and to protect them from HMRC, I’m not a mind-reader or a magician. I can only work with what is reasonably provided to me.