Can entertainment costs ever be tax deductible?

There is a fine line between promoting your company to potential customers and providing business entertainment, but the difference is important. Costs involving advertising are tax deductible whilst those in providing entertainment are not. Although this is the format that is generally accepted this does not completely rule out a tax deduction for providing food and drink for customers.

Whilst the law says that business entertainment costs are not 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 when it’s given freely.

For example, you would not be expected to be handed a bill at the end of a meeting with a customer for any food or drink consumed during the discussions. That wouldn’t be classed as hospitality, that would be trade – refreshments in exchange for payment. In fact, if you paid them with something other than cash it would still be trade-which means it can’t be entertainment.

It would be a marketing disaster to ask a potential client to pay for a glass of wine that has been handed to them at a trade stand. However it would not be so unreasonable to ask for a few moments of their time to answer a few questions in return. The courts have ruled that this may act as payment and have concluded that where there is an agreement between a business and an individual who receives food and drink for their time, this is a commercial deal and not entertainment.

According to the Tips & Advice-Tax magazine, the bottom line here is that a tax deduction can be claimed for the cost of food and drink offered as long as there is a “quid pro quo”, as the courts have put it. The most effective way to do this is to keep paperwork to prove that you have received a quid pro quo from your potential clients, in the form of a questionnaire for example. However you can’t use this loophole to justify claiming a posh lunch or dinner because the quid pro quo from them must reasonably match the value of hospitality given.

For more information on HMRC’s guidance manual visit (TX DE 14.22.04).

The information from this article is taken from Tips & Advice -Tax magazine, issue 22.

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