When you spend on entertaining existing client relationships or on future potential clients. This could include taking a client out for dinner and drinks or treating them to a show on West End.
What's included
Eating out or drinks with a client, tickets to shows and other hospitality arrangements.
What's not included
Staff Entertaining should be recorded separately so you can keep track of these costs.
How is it taxed?
In most cases, the cost of entertaining clients is not tax-deductible, and VAT is also not recoverable on expenditure. However the rules are quite complex, so we've provided some examples below of when you can and can't claim VAT/tax deductions.
Staff Parties - Your company can pay for an event for your staff and claim up to £150 per head as a deduction. The costs can include food, drink, tickets to events, accommodation and a taxi fare home. Be careful however because if it goes £1 over, then the whole amount is a benefit in kind.
VAT tip - If you're on the standard VAT scheme, you can reclaim to the extent the costs are applicable to staff. For example, if you have 2 staff and 2 guests, you could reclaim 50% of the VAT. If you're on the flat rate scheme, no VAT can be reclaimed.
Client Entertainment - Your company can pay for entertaining either existing clients or prospective ones, but this will not be an allowable deduction for Corporation Tax purposes. Remember though it is still worth paying from the company, as it saves you the income tax you would otherwise pay on withdrawing the funds to pay the costs personally.
Personal Entertainment - Your company can pay the costs of your own entertainment but will be deemed a benefit in kind. This will leave you no better off tax-wise than if you'd paid the cost yourself.
Tax tips
You won't get corporation tax relief on these costs - and you will need to report any costs attributable to staff onto your PSA or P11D.
Take care when using the annual staff party allowance.
VAT cannot be reclaimed on business entertaining costs.
It is important to remember that the effect of an expense being disallowable just means that it does not count towards reducing your taxable profits.
To frame this, take your rent expense of £600 per month as an example which is an allowable deduction. Overall this results in a £114 reduction in your corporation tax bill, therefore the transaction is costing your business £486 net after it is deducted from your taxable profits. When you compare this to a night out with your client that costs £250, the cost to the business will be the full £250. So the disallowable expense will be inherently more expensive to your company, however will still be cheaper than spending the cash out of your own pocket, as it is yet to have been subject to income tax.