A new client has started up as a sole trader after decades in corporate life. She doesn’t understand why, as a self-employed person, she can’t now claim the costs for entertaining a client to lunch, apart from her own food, when previously she could claim for herself and the client. Why is this?
Although for many business’, entertaining is an essential part of gaining new clients and keeping existing relationships strong, it does not qualify for tax relief. Unlike some expenses where there can be a ‘grey area’ over if it is allowed or not, entertaining has its own section within the corporation tax act which sets out the position rather clearly.
The only entertaining costs which are allowable are for staff entertaining and not client entertaining. Where staff (including a self-employed person) are hosting a client, rather than being entertained themselves, their portion of the costs is still considered client entertaining and therefore not allowable. It is also important to note that staff entertaining also has its own tax considerations that businesses should be aware of before providing (and we will cover this off later in this series).
Where the client entertainment is in the form of gifts, the same rules apply. The only exception to this is if the gift is a clear advertisement for the business and doesn’t breach any of the following conditions:
The gift is not food, drink, tobacco or a voucher exchangeable for goods
The cost of the gifts given to the client do not exceed £50 in the accounting period
Even though the position is clear, it does still leave many wondering “why?”.
The answer to this lies in the basic principle of what is a qualifying business expense. For an expense to qualify it must be “wholly and exclusively for the purposes of the trade” (or “wholly, exclusively and necessary” if it is a company).
Unfortunately, whilst the purposes of client entertaining may be for generating future business, it is difficult to argue that taking a client out for lunch is only for trading purposes, when the same things could be discussed a meeting on business premises (where only water is served!). Obviously, this is not the way things go in the real world, but when has that ever mattered to HMRC!
Chris Leslie, Tax Senior