Tax Questions: Can Company Directors Entertain Tax Free?

When you and other directors have just landed a new customer and you plan to celebrate in style, is the company entitled to a tax deduction?

Usually, expenses incurred by a company are tax deductible from profits if wholly and exclusively for trade.

One important exception is business entertainment. Even though an expenditure for the benefit of your company’s trade it is specifically excluded. An exception to the rule is made for expenditure on entertaining staff. This is tax deductible for the company.

How much can you spend?

Your company can be as lavish as it likes with staff entertainment, there’s no cap on the amount that can qualify for a tax deduction. However, the wholly and exclusively rule could be a problem. HMRC can deny a deduction for expenditure if disproportionately high so that it can’t be said to be for the purpose of the trade.

Taxable and non deductible

It’s usually assumed that if a director or employee is taxable on benefits in kind it’s part of their remuneration for their job and therefore the cost to the employer of providing it is automatically a tax- deductible expense. That’s a fallacy.

While salaries, benefits etc. are liable to tax as employment income of the recipient, this doesn’t impact on the wholly and exclusively rule, which operates independently. HMRC’s view is that excessive salary etc. has a non-trade element and the excess doesn’t pass as ‘wholly and exclusively’.

Let’s say a limited company is owned and managed by a husband and wife. They have a son at university who works several hours a week for the company doing odd jobs in holidays. To help, they arrange for the company to pay him a wage of £1,000 a week subject to PAYE tax and NI. This equates to £200 per hour. Clearly, the motive for such a high wage is the personal relationship and little to do with the input into the company’s trade. HMRC might accept around £15 per hour as tax deductible, but not the remainder.

Excessive salary or benefits in kind aren’t an issue where the person being paid or given a benefit is a controlling director of the employing company. HMRC is unlikely to argue about the cost to the company not meeting the wholly and exclusively test.

Where a company incurs spend on entertaining a director or employee, it’s a taxable benefit. The only exception is annually recurring entertainment such as a Christmas party, which isn’t taxable unless the cost per tax year per head exceeds £150.

Where entertainment is a taxable benefit for directors who are also shareholders, it’s usually more tax efficient for them to take an extra dividend and pay for it out of that than the company pay direct.

If entertainment provided is not disproportionate, a company can claim a tax deduction for a party. However, as a one-off event it counts as a taxable benefit in kind for each director. For directors who are also shareholders, they would be better off taking an extra dividend and paying for an event personally.

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