In the business world‚ client entertaining is a common practice. However‚ its treatment for corporation tax purposes is important to understand.
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The General Rule
Advertising costs are tax deductible whilst those for entertainment are not. The person being entertained may be a customer‚ a potential customer or any other person.
Why Entertainment Isn’t Deductible
Unfortunately‚ client entertainment is not tax deductible and cannot be claimed against your profits.
Paying for Client Entertainment
When taking clients out‚ always pay through the business rather than through personal accounts. While the expense will not be an allowable deduction for Corporation Tax purposes‚ you will save the income tax you would otherwise pay on withdrawing the funds.
Implications for Corporation Tax Calculation
This implies that such expenses must be added back to your profit when calculating corporation tax. This means that while the expense is a legitimate business outlay‚ it doesn’t reduce your taxable profit.
What Qualifies as Client Entertainment?
Client entertainment is broadly defined and can include:
- Taking clients to restaurants or bars
- Providing tickets to sporting events or concerts
- Offering gifts (beyond trivial promotional items)
- Providing hospitality at events
Exceptions and Considerations
While general client entertaining is disallowed‚ there are some potential exceptions and considerations to keep in mind:
- Staff Entertainment: Entertaining staff is generally allowable as a business expense for corporation tax purposes‚ provided it’s genuinely for staff welfare and not a disguised benefit for owners or directors.
- Business Gifts: Small promotional items with a clear business purpose may be allowable‚ but expensive gifts are generally treated as entertainment.
- Overseas Customers: There may be specific rules regarding entertaining overseas customers‚ particularly related to export promotion‚ which could allow for some tax relief. It’s crucial to consult with a tax advisor for specific guidance in these situations.
- Advertising and Promotion: If the event is primarily for advertising and promotion to a wider audience (not just specific clients)‚ it might be treated differently. Again‚ seek professional advice.
Record Keeping is Key
Regardless of whether you believe an expense might be allowable‚ meticulous record-keeping is essential. Keep detailed receipts and notes explaining the purpose of the entertainment‚ who was involved‚ and the business benefit derived. This will be invaluable if HMRC ever investigates your corporation tax return.
Seek Professional Advice
Tax laws are complex and can change. This article provides general information only and should not be considered financial or legal advice. It is always best to consult with a qualified accountant or tax advisor to determine the specific tax implications of your client entertainment expenses.
