Entertaining – Tax Considerations and Accounting Software

Posted on March 1, 2022

Accounting Software
Many of the accounting packages available to businesses are of US origin so a lot of the terminology is US oriented – much to my irritation. So we have “Aged Receivables” rather than “Trade Debtors”, “Aged Payables” instead of “Trade Creditors”. Not the end of the world I agree but you will often find in the chart of accounts “Entertaining – 100% Business” and “Entertaining – 0%” or something similar. Clients often use 100% business for client entertaining as, as far as they are concerned, the payment is solely for the business but this is the opposite of the UK rules for income tax and VAT. Claims of error-checking within the software are unlikely to pick this up.

Income Tax / Corporation Tax
In the UK we generally differentiate entertaining between client/customers and staff. Within client entertaining there are also potential benefit in kind implications if that is purely for social reasons rather than for a genuine business purpose. To make things clearer in the chart of accounts, I would often edit the description to reflect the UK rules.

With certain exceptions, expenditure on business entertainment or gifts is not allowable as a deduction against taxable profits, even if it is a genuine expense of the trade or business. One of the exceptions to the entertaining rule concerns the entertainment of employees. Staff entertaining is allowable so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment provided for customers – hence the reason why I would recommend amending the chart of account descriptions.

Gifts, which contain a conspicuous advertisement for the trader are generally allowed however, expenditure of this kind is not allowable if:

• the gift is food, drink, tobacco or a token or voucher exchangeable for goods, or
• the cost of the gift, together with the cost of any other gifts (except food, drink, tobacco or a token or voucher exchangeable for goods) to the same recipient in the relevant tax period, exceeds £50.

This is a complex area and some of the application of the rules subjective as can be seen from the Business Income Manual

VAT
Again with certain exceptions, you cannot recover input tax incurred on the provision of business entertainment expenses. This is important because software of US origin will typically default to standard rate VAT on “Entertainment – 100% business”. So these also need adjusting to avoid claiming input tax that is not allowable.

Where an employer provides entertainment for the benefit of employees for example, to reward them for good work or to maintain and improve staff morale, it does so wholly for business purposes. Thus the VAT incurred on entertainment for employees for example staff parties, team building exercises, staff outings and similar events is input tax and is not blocked from recovery under the business entertainment rules.

The application of the VAT rules in the area is contained within VAT Notice 700/65 and should be considered in conjunction with VAT Notice 700/7 relating to gifts and promotions.

Last Word
From the foregoing care needs to be taken as the rules for income tax / Corporation Tax  and VAT are slightly different – nothing is straight forward and relying on the claims of the software provider that what you produce will be error-checked is very much dependent on transactions being recorded accurately so it would be risky to rely upon such claims.