Client entertaining: what can you claim?
Taking a client for lunch, inviting a prospect to an event, or hosting a business contact can feel like a normal part of business development.
However, the tax treatment of entertaining is not always intuitive.
In many cases, client entertaining is a genuine business cost in the ordinary sense, but that does not automatically mean it is allowable for Corporation Tax, Income Tax or VAT purposes.
This guide explains the main rules and the common traps.
What counts as client entertaining?
Client entertaining usually means hospitality provided to people who are not employees of the business.
This could include:
- Taking a client or prospect for lunch or dinner
- Providing drinks after a meeting
- Inviting a customer to a sporting event
- Providing theatre, concert or event tickets
- Hosting a client hospitality event
- Paying for accommodation or travel linked to hospitality
- Providing food, drink or entertainment to suppliers, referrers or business contacts
The purpose may be commercial. You may be building a relationship, thanking a client or discussing future work.
But for tax purposes, the cost can still be treated as business entertaining.
Is client entertaining tax deductible?
In most cases, client entertaining is not tax deductible.
For a limited company, this usually means the cost is added back when calculating taxable profits for Corporation Tax.
For a sole trader or partnership, the same broad principle applies when calculating taxable business profits.
In practical terms, the business can still pay for the cost and record it in the accounts, but it is normally disallowed for tax purposes.
This is the key distinction:
- It may be a business cost in the accounts
- It may not reduce the tax bill
Can you reclaim VAT on client entertaining?
In most cases, VAT on client entertaining cannot be reclaimed.
HMRC’s business entertainment VAT guidance explains that input tax on business entertainment is generally blocked. This includes many costs incurred for entertaining clients, customers, suppliers and other non-employees.
You can check HMRC’s guidance on the GOV.UK Business entertainment VAT Notice.
This means that if you take a UK client to lunch and the restaurant bill includes VAT, the VAT is usually part of the cost to the business and should not normally be reclaimed.
What about staff entertaining?
Staff entertaining is treated differently.
Where an employer provides entertainment for employees, for example a staff party or team event, the cost may be allowable for tax purposes if it is provided wholly and exclusively for the business.
VAT may also be recoverable on staff entertainment where the entertainment is for the benefit of employees. HMRC’s VAT guidance confirms that VAT incurred on entertainment for employees is not blocked in the same way as business entertainment, although care is needed where directors, partners or non-employees are involved.
You can read HMRC’s internal guidance on staff entertainment and VAT.
Staff events and the annual function exemption
There is also a specific tax exemption for certain annual staff functions.
For example, a Christmas party or annual summer event may be exempt from a taxable benefit charge for employees if the conditions are met.
Broadly, the event must be:
- Annual
- Open to all employees, or all employees at a particular location
- Within the relevant per person cost limit
The commonly quoted limit is £150 per head including VAT. This is not an allowance. If the cost exceeds the limit, the exemption can be lost.
This rule relates to taxable benefits for employees. It should not be confused with client entertaining, which is treated differently.
What if directors attend?
Director entertainment can be more complicated.
If an event is only for directors, partners or business owners, HMRC may not accept that it is staff entertainment for VAT purposes.
However, if directors attend a genuine staff event along with other employees, the position is usually different.
This distinction matters especially for small owner managed companies, where the only people in the business may be directors.
In those cases, it is worth taking care before assuming staff entertainment rules apply.
Mixed events: employees and clients
Many events include both employees and non-employees.
For example, a company may hold an event attended by staff, clients, suppliers and referrers.
In that situation, the tax and VAT treatment may need to be split.
The employee element may be treated differently from the client or non-employee element.
For VAT, HMRC guidance explains that VAT may need to be apportioned where an event is used to entertain both employees and non-employees. The element relating to non-employees is generally blocked under the business entertainment rules.
Good records are important so that the split can be supported.
What records should you keep?
For any entertaining cost, it is helpful to keep clear records.
This should include:
- The receipt or invoice
- The date of the event
- Who attended
- Their relationship to the business
- The business purpose
- Whether attendees were employees, directors, clients, suppliers or guests
- Any split between staff and non-staff costs
- Whether VAT was reclaimed or blocked
The more mixed or expensive the event, the more important the records become.
A vague restaurant receipt with no note of who attended may be difficult to justify later.
Business meetings with food
Food and drink during a business meeting can still be entertaining.
A simple working lunch in the office may be different from taking a client to a restaurant, but the facts matter.
Questions to consider include:
- Was the food incidental to the meeting?
- Was hospitality the main purpose?
- Who attended?
- Were the attendees employees or clients?
- Was the cost reasonable?
- Was the meeting genuinely for business?
Labelling something as a “meeting” does not automatically change the tax treatment if the substance of the cost is entertaining.
Travel and subsistence are different
Client entertaining should not be confused with travel and subsistence.
If an employee or director is travelling for business and incurs reasonable meals or accommodation costs as part of that journey, those costs may fall under travel and subsistence rules rather than entertaining rules.
For example, a director travelling to visit a client may be able to claim their own business travel and subsistence costs, but the cost of taking the client out for dinner may be treated as client entertaining.
The distinction is important.
Gifts and promotional items
Business gifts have their own rules.
A small branded item may be treated differently from hospitality or entertainment, especially where it carries clear advertising and is not food, drink, tobacco or vouchers.
However, gifts can also have tax and VAT restrictions, so they should not automatically be assumed to be deductible.
If the cost is significant or the gift is valuable, it is worth checking the treatment before claiming tax relief or reclaiming VAT.
Common examples
Taking a client to lunch
This is usually client entertaining.
The cost may be recorded in the accounts, but it is normally disallowed for tax purposes and VAT is usually not recoverable.
Buying coffee for a client meeting
This may still be business entertaining if the coffee is provided to a client or prospect.
The amount may be small, but the principle is the same.
Staff Christmas party
This may qualify as staff entertaining.
The annual function exemption may apply for employee benefit purposes if the conditions are met, and VAT may be recoverable where the event is for employees.
Care is needed if guests, clients or directors only are involved.
Event attended by staff and clients
This may need to be split between staff entertaining and client entertaining.
The staff element and client element may have different tax and VAT treatment.
Director meal while travelling to a client
The director’s own meal may be travel and subsistence if the journey qualifies as business travel.
The client’s meal may be client entertaining.
Practical checklist
Before claiming entertaining costs, ask:
- Who attended?
- Were they employees, directors, clients or suppliers?
- What was the business purpose?
- Was the cost mainly hospitality or incidental to a business meeting?
- Is this staff entertaining or client entertaining?
- Does the annual function exemption apply?
- Does the cost need to be split?
- Should VAT be blocked?
- Is the treatment clearly recorded in the bookkeeping?
These questions help avoid problems later.
How CooperFaure can help
CooperFaure can help you understand the correct treatment of client entertaining, staff entertaining, travel, subsistence and business expenses.
We can support with:
- Reviewing expense categories
- Advising on tax deductibility
- Checking VAT treatment
- Setting up bookkeeping rules
- Reviewing staff event costs
- Identifying mixed entertainment costs
- Helping directors understand what can and cannot be claimed
If you are unsure how an entertaining cost should be treated, it is better to check before the VAT return or year end accounts are prepared.