Subsistence

Lunch is on me! What can I claim for entertaining?

I’ll put it on expenses. Let me take you out to lunch.  I’ll get this. I’ll put it through the business.

It sounds great and it certainly happens a lot on TV and in films, but what is actually allowed in the real world? There is a lot of confusion between subsistence and entertaining and the distinction is important because one is an allowable expense for tax and the other isn’t.

Subsistence is food and drink when you are travelling for business. What you can claim as subsistence depends on your particular business circumstances (see more). Subsistence is an allowable expense for tax.Entertaining is providing hospitality and entertaining for customers, potential customers and other people. This is most often food and drink but could include other forms of entertainment such as event tickets as well as accommodation, use of assets such as company yacht, gifts and free samples.You can include entertaining in your business accounts where it is a legitimate business expense. However you then have to discount the entertaining expenses in your tax return because it is not an allowable expense for tax as either a sole trader or limited company apart from very limited circumstances.

Subsistence versus Entertaining

Subsistence yes, entertaining no. It should be straightforward but real life is often not that clear cut so let’s look at some examples.

1. You take some clients or suppliers out for lunch near your home base. In this case the entire meal is definitely entertaining as there is no allowable travel involved and therefore no potential subsistence element.

2. You are staying away on business and pay for a meal for yourself, a subcontractor who works for you and some clients. Can you claim any of this for tax? It all depends on the primary purpose of your trip.

If your main purpose of your trip was for business then you may be able to include the cost of your own meal as a subsistence expense. Everyone else is classed as entertaining and is not allowable for tax. You would have to make sure that you satisfy all the conditions that allow the meal to be included as a subsistence expense. The fact that the meal was with other people should be incidental; in order to count as subsistence you would need to have been making the trip and having a meal anyway regardless of who else was with you.

If the purpose of your trip was to primarily to meet with the clients or suppliers for a meal, then the whole trip including travel would be counted as entertaining. This is the case even if you were discussing business while you ate.

3. You are a Limited Company director staying away on business with two employees. You pay for the evening meal for all the whole group.

In this case, because everyone was an employee of the company and it was a business trip, providing the circumstances of the trip satisfy all the necessary requirements, the meal is classed as subsistence and is allowable.

Just remember, although a subcontractor may feel like an employee for travel, subsistence and entertaining purposes they are not. They need to be on the payroll to be classed as an employee.

Entertaining of staff

There are still some circumstances where you can express your generosity through the company. You are allowed entertaining of payroll staff as a taxable expense providing it is within certain limits. The general idea is that you can pay for a few company events each year such as the work Christmas party, summer BBQ, staff outing etc.

However there are conditions to be met otherwise it becomes a taxable benefit to your employees and a penalty rather than a treat.

You can spend up to an average of £150 per person in total on company events throughout the year. However, in order to be eligible, all the events must be open to all employees of the company.

The £150 is a limit, not an allowance. This means that if you exceed £150 per person, the entire spend becomes a taxable benefit for the employees.

The average of £150 is obtained by taking the total cost of the event(s) including any provided transport, accommodation and VAT, then dividing it by the attendees (including invited non-employees) to get the average cost per head.

You can include yourself only if you are a limited company director, on the payroll and have other non-director staff. Directors with no other employees and sole traders cannot entertain themselves even at Christmas! Entertaining yourself is not allowed if you are a sole trader because you are not an employee of the business, you are the business.

Entertaining anyone who isn’t an employee of the company such as customers, potential customers, suppliers and subcontractors is also not allowed for tax.

How about gifts?

Entertaining is not just about food and drink, what about other perks and gifts? Again the rules are strict about gifts to non employees such as customers and more generous around gifts to payroll employees.

Gifts to non employees

You can send Christmas cards as a tax deductible expense.

You can also send small promotional gifts of up to around £50. However, the gifts must carry a clear advertisement  for the business (e.g with branding or logo) which must be on the gift itself, not just the wrapping. They can’t be alcohol, food, drink, tobacco (unless they are your business) or vouchers.

Non promotional gifts and larger gifts are classed as entertaining and are not tax deductible as an expense.

Gifts to employees

If you are self employed, you don’t have to report or pay tax on personal gifts to employees.

For limited companies the rules are different. If you give your employees a gift of less than £50 e.g. a couple of bottles of wine or a box of chocolates to celebrate Christmas or the birth of a child etc, then this will not normally be taxable. It is classed as a “trivial benefit“.

In the past this £50 limit was part of HMRC’s general guidance on trivial benefits, but it was made official from 6 April 2016 by Trivial Benefits in Kind Exemption as part of the 2016 Finance Act.

For more on this subject, take a look here – New trivial benefits in kind exemption is not so trivial.

Summary

If you are out for a meal you can only claim for yourself and any payroll employees providing all the conditions for subsistence are satisfied

You can’t ever claim for meals, coffee etc provided to non employees even if you are discussing business

Subcontractors do not count as staff even if you are treating them in the same way

You can provide staff with a Christmas party or other event providing the average per head limit of £150 is not exceeded across the year.

You can give staff a small Christmas present / life event present of value less than £50.

You can send Christmas cards to customers / suppliers and any gifts must be of value less than £50 and primarily promotional

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