Entertaining clients – what expenses can you claim?

I run a small limited company and take clients and potential clients out for lunches and dinners on quite a regular basis – a typical month might see 10 – 15 meetings – can I claim these client entertaining expenses and what records do I need to keep?

 

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As a rule, non-staff entertaining is not allowable for corporation tax purposes. There is nothing in this scenario which suggests the costs incurred can be considered anything but entertainment and as such will be disallowed when computing profits chargeable to corporation tax.

However just because they do not attract a corporation tax saving doesn’t mean they can’t still be put through your company as a cost, which is usually better than paying for them out of your own pocket, but we need to make sure there is no personal tax benefit in kind impact.

The treatment of these customer entertaining costs for benefit in kind tax purposes is determined by whether there is considered to be any personal benefit derived by yourself in taking these clients and potential clients for lunches and dinners.

HMRC makes a distinction here between business and non-business purposes.

As with any business costs they must be wholly and exclusively incurred for the purposes of your business.

If the meetings are not considered to be for ‘business purposes’ then HMRC can determine that the entertaining cost was incurred largely to benefit yourself as the director and as such should be treated as a taxable benefit in kind and attract personal tax and national insurance.

The grey area here is what is considered to be business purposes and where a line can be drawn to distinguish between those entertaining costs that would qualify and those that would not.

HMRC currently explain the differences between business and non-business entertainment as the below:

business entertainment of clients – e.g. discussing a particular business project or forming or maintaining a business connection

non-business entertainment of clients – e.g. entertaining a business acquaintance for social reasons

An example of an entertaining expense that would qualify for business purposes would be meeting a client or potential new client at a local chain restaurant for a relatively inexpensive lunch to discuss a potential upcoming contract. In this scenario there should be no personal tax issues for yourself so long as reasonable records are kept to justify the expenditure, such as who you met and the reasons for the meeting. The lack of decent record keeping, in some scenarios, is likely to be the deciding factor should HMRC investigate.

An example of an entertaining expense that may not qualify as a business expense would be meeting a client, who also happens to be a friend, at a Michelin star restaurant where you went through the seven course taster menu with matching wines. HMRC may argue that this is excessive and there is a clear personal benefit to yourself and as such it should be treated as a taxable benefit.

The above two scenarios are a fairly extreme for illustrative purposes, it is in the middle ground where it is more difficult to determine where the business purpose ends.

There is no clear guidance given by HMRC, it is largely down to the business owner to police and decide on a case-by-case basis.

If there is a clear case that the expense is personal in nature we would recommend at first classifying the transaction to the directors’ loan account, where it can either be cleared by way of a dividend or other business expense incurred personally over the course of the year.

You might want to also check out another article we have written about client gifts.

We hope this article has helped you understand what client entertaining expenses you can claim.