Special rules prevent tax relief being allowed for the cost of business entertainment, but certain related costs escape. How do the blocking rules apply and what are the exceptions?
All businesses are prevented by law from claiming a tax deduction against profits for expenses they incur on business entertaining. There’s a similar rule for directors and employees which stops them from receiving a tax deduction from their earnings where they spend the money on entertainment. The two rules have to operate in tandem to avoid a double disallowance of tax relief.
Reimbursement Costs Are Exempt
If a director or employee personally pays for business entertainment, e.g. taking a customer for lunch, and your company reimburses them, the reimbursement is exempt from tax and NI. This makes the arrangement cost neutral for the director or employee but doesn’t affect the business’ tax position.
If in 2016/17 you spend £6,000 taking customers for meals etc. Your company reimburses you so that you’re not out of pocket. You’re not liable to be taxed on the reimbursed amount, but only as long as your company disallows the expense when working out its corporation tax (CT) bill. If it doesn’t do so, you’re liable to be taxed on the reimbursed amount you receive.
For years up to an including 2015/16, expenses reimbursed to directors and employees counted as taxable income which the employer was required to report on form P11D. The director or employee was entitled to claim a tax deduction against that income. This cancelled out any tax liability. This “assess and allow” process is replaced for 2016/17 later years by applying a tax exemption for reimbursed business expenses.
As a general rule it’s more tax efficient overall for a business to reimburse a director or employee for entertaining expenses. This is because if there’s no cost of entertaining for the company a disallowance can’t apply to it. Instead the disallowance falls on the director or employee who incurred the cost.
If you’re a director shareholder of a company you should claim reimbursement of all business expenses, including those for entertainment, which you incur on its behalf, this results in the most tax-efficient outcome.
Exceptions To The Disallowance Rule
It’s a common misconception that costs related to business entertainment are always caught by the disallowance rule. This most frequently applies where a director or employee travels to meet a customer for, say, lunch where the main purpose of the meeting is to discuss business.
Notify your employees that they must always itemise travel costs associated with business meetings.
Also make your bookkeeper aware that this type of expense should not be recorded as business entertainment unless that was the primary purpose of the meeting. Doing so will result in your accountant disallowing it when working out your company’s CT bill.
Costs reimbursed to a director or employee for business entertainment are tax and NI exempt as long as the business doesn’t claim a tax deduction for them. However, a company can claim a tax deduction for travel expenses related to business entertainment without this resulting in a tax charge for the worker.
If you have any queries on the above, or would like to discuss this in more detail, please contact Sarah Salton on 01925 761 600 or email her at firstname.lastname@example.org.