Old fashioned wining and dining is a great way to establish and maintain good relationships with clients and prospects. A question we are asked a lot however is whether taking a potential or existing client out for a meal is covered as a business expense.
This depends. There are rules about what businesses can and can’t claim back. HMRC defines entertainment expenses as those costs you incur when providing either subsidised or free hospitality to clients or staff (for example football tickets, a meal, or use of company assets such as executive suites for entertaining purposes).
In most cases, the cost of entertaining is not tax-deductible, and VAT is not recoverable on expenditure (if your business is VAT registered, you can’t reclaim any VAT paid on customer entertaining expenses). However, as always, the rules are complex, and VAT can be reclaimed in certain circumstances.
If you are a limited company, your company can pay for entertaining of clients or potential clients, but this will not be an allowable deduction for Corporation Tax purposes. Likewise, if you are a sole trader, entertaining clients or customers can’t be claimed as an allowable expense either. So, although your business can pay the bill, costs can’t be deducted when your accountant is working out how much income tax and NI is payable. Nevertheless, it is more tax efficient that you paying for it out of your own pocket.
Remember as with any business costs, the meal, or entertainment, needs to be for legitimate business reasons, not purely social – if not you would be personally liable for tax and NI.
So before shouting “lunch is on me!”, make sure you know what you can and can’t do regarding claiming expenses when entertaining clients.