When preparing the tax computation, you should adjust the trading profits by adding back disallowable items, such as any element of client entertaining as explained below.
Statutory background
The general rule is that no tax deduction is allowed in calculating the profits of a trade for expenses incurred in providing entertainment or gifts in connection with the trade (s1298 CTA 2009)
The term ‘entertainment’ is defined to include ‘hospitality of any kind’ and the expenses incurred in providing entertainment or a gift are defined to include ‘expenses incurred in providing anything incidental to the provision of entertainment or a gift’.
Establishing whether the costs are promotional or entertainment
HMRC’s view is that the food and drink costs are hospitality and so always disallowable under s1298 CTA 2009 – unless the hospitality provided is “minimal” (BIM45050).
In the case of Netlogic Consulting Ltd v HMRC (2005) SpC 477, the costs were split between food and drink provided and the cost of hiring the room. The courts found that the room hire was an allowable tax deduction because based on the facts of the case it was established that ‘the entertainment was incidental to the promotional purpose of the meeting, rather than the hire of the room being incidental to the provision of the entertainment’.
Check that the costs of advertising and marketing do not fall within the definition of entertaining. HMRC’s view at BIM45050 sets out to clarify the matter:
‘An example of allowable expenditure is an event arranged by a car manufacturer to allow potential customers to test drive new cars. However, if the manufacturer arranges a golf day at which test drives are available then only the direct costs of the test drives and of any publicity material provided are not disallowed by the legislation.
Similarly, the costs of a book launch at which food and wine are provided and where the author and invited guests are entertained together with journalists and booksellers is disallowable under the legislation. However, where any hospitality provided is minimal no disallowance need be made.’
Gifts provided at the event
If gifts were provided at the event there are four sets of circumstances within s1300 CTA 2009 (see BIM45065) which will not deny a tax deduction and relief will be due. These are:
- Case A is where the gift is of an item which it is the trader’s trade to provide, and the item is given away in the ordinary course of the trade in order to advertise to the public generally.
- Case B is where the gift incorporates a conspicuous advertisement for the donor.
However, this relaxation does not apply if:
- the item consists of food, drink, tobacco or of any token or voucher exchangeable for goods; or
- the cost of the gift to the donor, taken together with the cost to him of any other such articles given by him to that person in the same ‘basis period’, exceeds £50. In calculating this total, the cost of such items as are referred to in (a) above (food, etc.) are ignored;
- Case C is where gifts are provided for the trader’s employees unless gifts are also provided for others and the provision for employees is incidental to the provision for others; and
- Case D covers gifts given to a charity, to the Historic Buildings and Monuments Commission for England, and to the Trustees of the National Heritage Memorial Fund
Exceptions
S1299 CTA 2009 provides an exception to the business entertaining rule that concerns the entertainment of employees. Staff entertaining is allowable, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers (see BIM45033 and BIM45034) This includes a staff Christmas party or other event open to all employees provided by the employer.
There may, of course, be other tax repercussions involving VAT input tax recovery and BIK issues for employees.
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