Your Roadmap to Claiming Staff and Client Entertainment Expenses Like a Pro

Entertaining clients (and paying for staff Christmas parties!) is a business practice as old as time that helps secure business relationships and lets employees have a little fun every once in a while.

It’s such a recognised aspect of business that HMRC has an entire set of rules around client and employee expenses - which you could easily fall on the wrong side of, as the guidelines are pretty strict.

To help ensure you’re doing all the right things when you’re out schmoozing clients or partying with colleagues, we’ve compiled a quick guide on the basics of client and employee expenses. Keep reading.

Client entertainment expenses

Client entertainment is generally considered any activity or event you host or pay for to foster a business relationship. Here’s a quick explainer of how client entertainment works regarding taxes.

What counts as client entertainment?

There isn’t a one-size-fits-all answer to this, but some general rules exist. Client entertainment is anything you pay to build a relationship with a new or existing client. This means meals at restaurants, tickets to big events, or even the cost of a round of golf.

Some businesses also include more premium experiences, like spa days or weekend retreats. These expenses are distinct from day-to-day operational expenses, as they’re geared up for building relationships.

How do client entertainment expenses work with taxes?

Generally, VAT on client entertainment expenses isn’t recoverable. Even though you can’t claim back the VAT, keeping good records and tracking receipts is vital if you get audited by HMRC.

Sadly, it’s the same with corporation tax - client entertainment isn’t deductible from whatever corporation tax rate you pay. This means these expenses are added to the business profits when calculating taxable income.

Claiming back client entertainment expenses

Detailed records are essential to claim client entertainment expenses in the UK. Keep all receipts and invoices, and document the event's purpose, attendees and date. When filing taxes, these expenses usually fall under the 'Entertaining Costs' section. 

Some expenses may also need to be reported on a P11D form. Be careful: not all client entertainment is tax-deductible. Avoid common pitfalls like claiming overly lavish events or those not directly related to business, as these could trigger an audit.

Employee entertainment expenses

We’ve all had the social secretary of the workplace send that round-robin email reminding everyone to RSVP for the office party “for tax reasons”. Now that you’re on the other side, here’s what you need to know about employee entertainment expenses.

What counts as employee entertainment?

Employee entertainment counts as anything the employer organises to keep its staff entertained. This can include team-building outings, the beloved (or dreaded) Christmas party and office lunches. It’s separate from client entertainment expenses and is treated differently by HMRC.

There are legal limitations to consider with employee entertainment - for example, the spending can’t be too lavish and should adhere to health and safety guidelines. Failure to comply could result in legal repercussions, so you might find it easier to hire an accountant to help out.

How does employee entertainment work with taxes?

You get £150 per head as a tax exemption as an employer - this can also include spouses. Sticking to this limit means you don’t need to report the event to HMRC on a P11D form or worry about additional National Insurance to pay.

It’s important to note that employee entertainment expenses are an exemption, not an allowance - meaning the money has to be spent and then claimed via a tax form. That means no cheeky workarounds with vouchers or gift cards.

The £150 per head needs to cover all party costs, including food, transport and accommodation. There are exceptions to the rule, such as when entertainment is part of a contractual obligation, but it’s worth checking in with a tax adviser if you’re unsure about anything.

Overspending on employee entertainment

Anything over the £150-a-head limit means you can’t claim the tax exemption. Instead, going over the limit becomes a benefit-in-kind and is subject to an additional 1A National Insurance tax. That’s on the entire amount of the party, so it’s really worth sticking to the limit to avoid this pitfall.

The grand total needs to include VAT and, unfortunately, that £150 limit per person is for the entire year, not per event. If you’re looking to host a summer retreat and a winter party, both of these need to fit under the £150 per head to avoid extra tax. HMRC makes the rules, not us!

Need advice on entertainment expenses?

Client and employee entertainment expenses can be an absolute minefield for employers to navigate because the rules are strict, and there are certain exceptions to take advantage of. Your best bet is to involve a tax professional to ensure you’re on the right side of the law.

Need some help? We’re all about making accounting simple for you and your business. Get in touch today if you want a free initial consultation on how we can help your company’s finances work better.