There are many forms that entertaining can take, usually it is food and drink but you can also include things such as gifts, free products or event tickets. Regardless of who it is for you can include these in your business accounts, if it is a genuine business expense, but there are different rules in regards to tax depending on the beneficiary of the hospitality.
Clients, potential clients & business contacts
In the majority of cases entertaining of this type is not an allowable expense for tax purposes, regardless of whether you are a sole trader or limited company. If you are at a business meeting with clients and an employee is present, meals could be classed as subsistence instead of entertaining, though there are certain criteria for this classification.
The VAT treatment can differ to this. For example, if you are entertaining an overseas customer, as long as the expense is in relation to a ‘business meeting’ input tax could be claimed on the cost.
The good news is you are generally allowed to entertain staff on your payroll as a tax-deductible expense. Although you get a tax deduction as the employer, the receipt of hospitality can be taxed on the employees. There is an exemption for annual functions up to a cumulative value of £150 in the year. One of the common cases is the work Christmas party, as long as the event is open to all employees of the company you can spend up to an average of £150 per person on the event (note per person, not employee, as spouses can be included in this calculation). Be careful though, if you go over this limit it would be classed as a benefit in kind and the employee would be taxed on this. The £150 would include everything to do with the event, so if you pay for accommodation and transport as well, this could add up. If you are a director you can also include yourself in this, but if you are the only employee you cannot, so no parties for one. This exclusion from exemption also includes sole traders as you are not classed as an employee of the business.