Are Entertainment Costs Ever Tax Deductible?

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You’ve taken a stand at a trade fair, and to pull in the punters you’ve splashed out on some booze and fancy nibbles. Normally there’s no tax deduction for this type of expense, but you can take steps to change this – what are they?

Here at DLR Accountants, we are committed to keeping you updated with all the important information you need to know.

Advertising or entertainment

The line between promoting your company to customers and providing business entertainment can be a fine one, but the difference is important. Advertising costs are tax deductible while those for entertainment are not. However, this doesn’t necessarily rule out a tax deduction for schmoozing customers with a glass of vino and a bite to eat.

The rules

While the law clearly says business entertainment costs aren’t tax deductible, there’s no exact definition. This has been left up to the courts to decide and over the years they’ve come up with a pretty broad interpretation, which is that it’s “hospitality of any kind” , but only where it’s given freely.

That’s not entertainment

For example, you wouldn’t expect to be handed a bill at the end of a meeting with a customer for the tea and sandwiches you consumed during the discussions. That wouldn’t be hospitality, that would be a trade – refreshments in exchange for payment. In fact, if you paid them with something other than cash it would still be a trade – which means it can’t be entertainment.

Payback

It would be a marketing disaster to ask a potential client to pay for the glass of wine you handed them when they visited your trade stand. Nevertheless, it wouldn’t be unreasonable to ask them to answer a few questions in return. The courts have ruled that this might count as payment.

What counts as payment?

The courts have concluded that where there’s an agreement between a business and an individual who receives food and drink for their time and effort, this is a commercial deal and not business entertainment. HMRC hates this ruling, but grudgingly accepts and acknowledges it in its internal guidance manuals (see The next step ).

Quid pro quo

The bottom line is that you can claim a tax deduction for the cost of food and drink offered to potential customers etc. as long as there is, as the courts put it, a “quid pro quo” from them.

Tip 1. At a trade fair, exhibition, etc. you could ask potential clients to fill in a simple questionnaire about what they thought of your stand; for example, did it appeal to them, what did they like, what didn’t they like? This principle could be used to claim a tax deduction for the cost of refreshments you provide for a customer feedback or product testing session held at your firm’s premises.

Tip 2. Keep paperwork to prove that you’ve received quid pro quo from your potential clients etc. For example, keep their completed questionnaires.

A word of caution. You can’t use this loophole to justify claiming the cost of buying a customer a posh lunch or dinner. The quid pro quo from them must reasonably match the value of the hospitality you’ve given them

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Posted in Tax Tips

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