As a business owner in the UK, it’s crucial to understand the tax, National Insurance, and reporting obligations associated with providing entertainment for clients through your employees. Whether it’s wining and dining a client or hosting social events, certain rules govern the financial aspects of these activities. In this article, we’ll explain what constitutes entertaining a client, differentiate between business and non-business entertainment, and outline how they can impact your tax, National Insurance, and reporting obligations.
What Qualifies as entertaining a client?
Entertainment includes various activities such as dining, drinking, and hospitality provided to clients. When your employees engage in such activities on behalf of your business, it becomes necessary to consider the tax and National Insurance implications and fulfil reporting requirements.
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Entertaining a client for business purposes
Business entertainment refers to instances where you entertain clients with the specific purpose of discussing a business project or establishing and nurturing business connections. The rules for business entertainment remain the same regardless of whether you directly arrange and pay for the entertainment, pay a supplier for entertainment arranged by your employee, or reimburse your employee’s entertainment expenses.
In all cases, you must report the cost of business entertainment on form P11D. However, you are not required to deduct or pay any tax or National Insurance on these expenses.
Non-Business Entertainment for clients
Non-business entertainment involves entertaining clients for social reasons or maintaining business acquaintances outside of specific projects. The tax, National Insurance, and reporting obligations for non-business entertainment differ based on who arranges and pays for the entertainment.
Entertainment for clients Arranged and Paid by Your Business
If your business arranges and pays for non-business entertainment, you must report the cost on form P11D and pay Class 1A National Insurance based on the value of the benefit provided.
Entertainment for clients Arranged by the Employee and Paid by Your Business
When your employee arranges non-business entertainment, and your business covers the expenses, you must report the cost on form P11D. Additionally, you need to add the full cost to the employee’s earnings and deduct Class 1 National Insurance (but not PAYE tax) through payroll.
Entertainment for clients Arranged and Paid by the Employee, with Reimbursement by Your Business
In the case where your employee arranges and pays for non-business entertainment, and your business reimburses the employee, the reimbursement amount is considered earnings. Consequently, you should add it to the employee’s other earnings and deduct PAYE tax and Class 1 National Insurance through payroll.
Completing form P11D
When completing form P11D, an entertainment-related tick-box helps HMRC determine whether your employee can claim a tax deduction for the entertainment expenses provided by your business. If you are completing the form for a charity or a tonnage tax company, you don’t need to enter anything in the box.
For other businesses, tick the box if the cost of the entertainment will be disallowed in your business’s tax calculations. Conversely, put a cross in the box if the cost won’t be disallowed.
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