Income tax, corporation tax and VAT legislation each contain a similar rule which blocks a tax deduction for “business entertainment” costs. This includes hospitality of any sort.
A common example is where a business provides food and drink for an individual, say a customer. However, not all such supplies are business entertainment.
Tip. The exception to the rule is staff entertainment. This cost is always tax deductible because it’s part of the cost of employing workers. However, there are usually tax consequences for the employees who are entertained.
Part of the business
The cost of food and drink is, of course, a deductible expense where it’s part of your business to provide it, e.g. restaurants, cafés, etc. The food is provided in the course of the business and not supplementary to it and is clearly not hospitality. The trouble is the further removed from catering your business is the more problematic claiming a tax deduction for this type of cost becomes.
Not part of the business
At the other end of the spectrum is, say, a manufacturing company which wines and dines its customers to keep them sweet. It’s done to promote the business but clearly is not part of it. Providing hospitality is the motive. In between this situation and the one set out above are businesses such as our subscriber’s.
Our example puts on training courses and seminars. These last between two hours and a full day (around eight hours including breaks). They provide tea and biscuits for those on short courses. For those who attend for a full day there’s a lunch. HMRC didn’t object to the tax deduction claimed for the light refreshments but it did for the lunches, on the grounds that it was hospitality.
Tip. In practice HMRC has always accepted that the cost of light refreshments (tea, soft drinks biscuits, etc.) at a business meeting or event is tax deductible in all circumstances except where the motive is hospitality, e.g. taking a prospective client for a drink at a café or pub.
All part of the service
Our examples response to HMRC’s argument is that they provide lunch as part of the courses. While not directly connected with the services they are selling, the lunches are part and parcel of what the charge is for. In essence when customers pay for a seminar they are also paying for the food and drink. it would be difficult for HMRC to successfully dispute it if the case went to tribunal.
Tip. To put the matter beyond doubt, where you provide food and drink which is more substantial than light refreshment as part of what you’re selling, mention it in your advertising and invoices. It doesn’t change the facts but it does make them clearer. The cost is tax deductible because the food and drink is part of the product being sold for which payment is being made. The motive and purpose is not hospitality.
What to do next
This article is our attempt to make an article recently released in Tax Essentials for Advisors accessible to all. Why not leave a comment and let us know how we did? For further information on this and other topics contact us at 01332-369999 or through the contact page of our website www.milestone-solutions.co.uk