Summary

In this episode we will look at entertaining in detail. When entertaining costs considered marketing and how to treat sponsorship. These categories of costs are notoriously misunderstood so make sure you tune in to find out more. Enjoy.

 

Natasha 00:25
Hello and welcome to Tax Able. Today’s episode is called “Let Us Entertain You” and in this episode I’m going to try and debunk a load of misconceptions about hospitality. Is it entertaining or is it marketing and what is sponsorship?

 

Natasha 00:41
You may think if you take a client out for lunch there is a proper business expense, so you ought to receive a tax deduction for the cost and be able to reclaim the VAT. After all, entertaining is one of the most important ways for people to market their businesses. Unfortunately, HMRC does not see it that way.

 

Natasha 01:00
The basic rule for entertaining is that you get no relief whatsoever from any taxes. Yes, it does represent an expense in your account and the business does pay for it but it’s not tax deductible and you cannot reclaim the VAT as it’s specifically blocked. But what is entertaining? Well, it includes hospitality of any kind provided by a business in connection with its business. It’s usually free to the recipient and it includes food, alcohol or gifts given to another person, whether that be a customer, a supplier, or essentially anyone who is not an employee.

 

Natasha 01:37
That’s the technical definition, but I’m sure you’ve all given or received a form of entertaining at some point, whether it be a meal with a client or a day out at the races. As always in Tax, there are exceptions to the rule and if you meet these exceptions then the costs are fully tax deductible and the VAT can be reclaimed. The first one is entertainment or gift provided to employees and if you want more information on this then please listen to episode two which is called “How to Crack the Christmas Tax Code”. Second one is if you recharge the cost of the entertainment to the customer, but you must make it clear on the invoice that it’s been recharged.

 

Natasha 02:16
Now sometimes entertaining is not entertaining, instead it’s marketing and the question is when does entertaining become marketing. You want your costs to be marketing as they are tax deductible and you can reclaim the VAT. There is no one size fits all as each event needs to be considered on its own merit. But if you have an awareness of the rules, it will help you from missing out on costs which are not entertaining and you should be receiving relief for. After all, every Penny counts.

 

Natasha 02:44
Let’s take a look at an example. We have a company which held an event to promote his services to potential clients. Pretty standard. The cost was split between two invoices. Invoice one is for £1,500 for catering and invoice two is £500 for room hire. Again, pretty run of the mill event. Most people would put the two costs together and the company wouldn’t receive any relief for the £2,000 expense. But actually in this case the £1,500 for catering is entertaining and the £500 for room hire is allowable as it’s not incidental to the promotional purpose of the event.

 

Natasha 03:23
Sometimes catering can also be classes marketing if it’s quite small and by this we mean small bottles of water provided or very small snacks. If you’ve got a tasting menu and paired wine, probably not going to be classed as marketing and it will fall into entertaining. The key point takeaway here is that your finance team needs to be aware of the rules to correctly split the cost or know when to raise a question with your advisor. It may take some trial and error, but you will get to grips with the rules eventually.

 

Natasha 03:52
As you can imagine, it’s difficult to know where the line can be drawn and when we have a grey area in tax, we look to the courts and what can we take away from the courts? Well, first of all, if you provide hospitality to anyone who’s not an employee, it’s likely entertaining. Secondly, subsidised events usually count, so if you hold an event and for example, ask people to pay £10 to get in, this does not stop it from being class as entertainment. Even though it’s not being given free of charge. Thirdly, if there’s a contractual obligation to provide hospitality, then it’s unlikely to be entertaining. For example, a football club was required to pay for food and accommodation of the visiting team under UEFA for rules because it was contractually obliged. It did not class as entertaining and it was fully tax deductible and the VAT could be reclaimed. Finally, quid pro quo if not entertaining. If you can show, you also receive something of the same value in return, a sort of to me to you relationship.

 

Natasha 04:50
A tip is for you to remember. If any employee and that includes directors pay for entertaining personally, then they’re able to reclaim the expense from the business and receive the balance in full as a reimbursed expense. Now let’s take a look at some common examples to clear up. Firstly, if an employee takes a customer to a restaurant, the whole bill is entertaining. You do not split out the employee element. Secondly, if an employer pays for an employee’s annual golf subscription and the aim of the subscription is to encourage socialising with business contacts then the cost is not incidental to entertaining as the cost is not entertaining.

 

Natasha 05:30
The company will receive tax relief for the cost, but as the employee is receiving a benefit, it will have to report and pay tax on a form called P11D. If you are an owner managed business, I suggest you weigh up the difference between the company paying for the subscription, including the benefit in kind against you paying for it personally. On the other side, your guests green fee would be class as entertaining, although the membership is all about marketing and socialising when you pay for someone else that gets caught.

 

Natasha 06:00
Finally, travel costs to and from the entertaining event. Those are usually incidental and they get all wrapped up into one and the whole cost is not allowable. So we’ve looked at entertaining and detail and you’re probably fed up by now of hearing the word. So let’s move on. Next, we’re going to look at marketing, and there is a fine line between this and the previous category. Just because you think it’s a marketing event does not mean that it necessarily is.

 

Natasha 06:28
Promotional events are arranged for the purpose of publicity, and they’re not entertaining, but the cost of any food, drink or other hospitality contained within them are. The best way to sum this up is to look at an example. A car manufacturer is looking to arrange a day for people to test drive its cars. Fine for marketing, but if they arrange a golf day and at that day you can come and test drive the cars. The test drive costs and the promotional materials are marketing. The rest is entertaining.

 

Natasha 06:58
Next, we’re going to look at gifts. We did cover this in detail in episode two, but we will have a quick recap. So a business can give business samples, but it all depends on what your trade is. If you are a wine company or Chocolatier, you can give out samples of wine or chocolate because they are related to your business. If this is not your trade, then you cannot give those items because they are specifically blocked.

 

Natasha 07:25
For a gift to be classed as a business sample it must carry a clear advertisement for the business and that could be branding or a logo, and it must be on the gift itself, not just on the wrapping. People have tried and failed in this area many times. Costs are not deductible if they exceed £50 are; alcohol, food, drink, tobacco, unless this is your business or vouchers. Now, for VAT purposes, you can recover the VAT if the value of the gift does not exceed £50. However, this limit is applied on a rolling twelve month period.

 

Natasha 08:00
The other thing to consider is whether the gift you’re giving is incidental to your trade. A common example is when a coffee or drink is given to you when you go to the hairdresser or the casino. As the cost of the gift is not excessive, they’re considered to be part of the overall service you’re providing and they are allowable for the VAT and for tax. But if you’re unsure, run your gift ideas past your adviser.

 

Natasha 08:25
Now, the final element we’re going to look at is sponsorship and this falls somewhere in between advertising and charitable donations. If it qualifies, then the cost is fully deductible. Sponsorship is a way for a business to obtain a commercial benefit by bringing your name, product or service to public attention. A business will try to obtain a benefit by the way of reputation or goodwill associated with a popular and successful event or person and it can be quite costly to be allowable for tax. The cost must be wholly and exclusively for the purpose of your trade. Any personal benefit will likely cause it to fall out of sponsorship and be disallowable.

 

Natasha 09:08
Where people have got into hot water is where there’s a personal connection and examples of that are sponsoring your child’s sports team or sponsoring a partner’s business. However, if you do sponsor a relative, you need to show that the cost is commercially justified. For example, if your business is in motor racing and you sponsor a driver or team, even if that driver is your son, you have a good case for it to be sponsorship. But as always, there’s no one size fits all. You will need to seek advice.

 

Natasha 09:37
Please also make sure that you have a sponsorship agreement which makes it clear that the sole purpose behind the payment is publicity for the sponsor. HMRC will seek to challenge any of the costs if there is a lack of commerciality. So, make sure you keep evidence on file just in case you get an enquiry.

 

Natasha 09:55
We’ve come to the end of the episode and what can you take away from today? Well, firstly, you do not receive relief for entertaining to make sure your costs are correctly classified. Secondly, an awareness of the rules can save you from unnecessarily paying tax on marketing costs. And lastly, check in with your tax advisor before you agree to a sponsorship deal. As a side note, if you’ve enjoyed today’s episode please make sure you click subscribe to listen to the new episodes as they are released.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Please visit my disclaimers page. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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