Unwrapping the tax: Business entertainment and gifts

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By ICAS

7 November 2023

For decades, there have been special rules on the tax treatment of business entertainment and gifts provided to clients and other business contacts. We take a look at the rules surrounding business entertainment and gifts.

Understanding the general position

The general position is that expenditure on business entertainment and gifts is not deductible from the business’ trading profits. This means expenditure on this should be disallowed in tax computations.

For companies, this is outlined in Section 1298 of the Corporation Tax Act 2009. For unincorporated businesses, this is outlined in Section 45 of the Income Tax (Trading and Other Income) Act 2005.

As always, there are exceptions to the general rule. These can be found in Sections 1299 and 1300 CTA 2009 for companies, and Sections 46 and 47 ITTOIA 2005 for unincorporated businesses.

Although the legislation for companies and unincorporated businesses are in different Acts, the rules are essentially the same.

Trade samples

If the gift or entertainment is part of the business of the trader and are given as part of the advertisement of a product to the general public, such as trade samples, this would be allowable.

This makes the context of the business important. Here are two examples:

• An alcohol manufacturer gifts a miniature bottle of alcohol as a trade sample to the public. This would be classed as an allowable deduction as it showcases their product.
• Someone who runs a joinery business gifts customers a bottle of wine at Christmas. This would be disallowed as the bottle of wine is not the business’ trade to provide, so the special rules for trade samples can’t apply.

Small gifts with a clear advert for the business

There is a specific exception for small gifts where there is a clear advertisement for the trader. This exception normally enables things like calendars, golf umbrellas, pens and other similar items to be gifted.

To qualify for the exception:

• The gift must have a prominent advert, such as a company logo.
• The cost of the gift, plus any other gifts to the same recipient, must not exceed £50 per accounting year for companies, or per tax year for unincorporated businesses

The exception can't apply if the gift is food, drink or tobacco, or a voucher which can be exchanged for any of these things. However, if the gift was a trade sample, it may qualify for the exception above.

Staff entertaining and gifts

The cost of staff entertaining and staff gifts provided to employees would normally be an allowable deduction from the business’ taxable profits.

However, if a company's employees receive entertainment or gifts that are incidental to the entertainment and/or gifts provided to others, this will be classed as part of the cost of client entertaining and/or client gifts. This is disallowable in the tax computation of the business.

It’s important to determine whether the expenditure is classed as client or staff entertaining/gifts as this will have an impact on the employment taxes issues for the employee or director.

• Client entertaining (whilst not tax deductible for the business) is not a taxable benefit on the employee as long as it relates to their duties of employment.
• Staff entertaining (which should be tax deductible for the business) could be taxable, although there are exemptions for annual social functions and parties open to all employees and trivial benefits.

There have been instances where HMRC has considered whether the individuals being entertained were business contacts or customers. For example, if a director were to entertain their family or friends, who are neither a customer or supplier or other business contact, this would likely be classed as staff entertainment and follow the treatment above. In some cases, the circumstances will need to be looked at closely before determining the correct treatment.

In cases where staff entertaining and/or gifts would lead to a taxable benefit in kind on the employee, many employers enter into a PAYE settlement agreement with HMRC. This allows the employer to pay the tax and national insurance on behalf of the employee, although it will be more expensive as the amounts included are “grossed up” by the employee’s tax rate.

Special rules for the hospitality sector

HMRC manual BIM45030 covers special rules for businesses in the hospitality sector that sell goods or services as part of the normal course of trade. This is not classed as business entertainment, and the relevant expenditure in providing the hospitality would be allowable as a deduction from trading profits. However, this exception won’t apply where goods or services are subsidised or given away, unless it is for advertising purposes, which is explored further in HMRC manual BIM45032.

If we take a restaurant business for example, the business may offer special offers to the public such as ‘two meals for the price of one’. This would be part of the normal course of trade and wouldn’t be considered business entertainment. However, if the same restaurant gave free meals to selected friends or customers, this wouldn’t be part of the normal course of trade, and the cost of the meals would be disallowable.

A further example would be where the hospitality is not part of the main trade but is part of the service which customers would normally expect from that trade. HMRC give the example of customers being provided a tea or coffee in the hairdressers or refreshments at a casino. As long as the expenditure is not “excessive”, HMRC should accept that the cost of the refreshments is included in the overall price that the customer pays.

Gifts to charities and good causes

The tax treatment of entertaining and gifts can be complicated when they interact with donations to charity and sponsorship for good causes, such as supporting community groups and organisations.

Sponsorship of local good causes are likely to be deductible from the taxable profits of the business. This would be particularly so if there’s an element of promotion or publicity of the business, like a prominent advert in recognition of the sponsorship.

Charitable donations

For companies, charitable donations are different. These are added back in the calculation of trading profits, but then deducted from profits chargeable to corporation tax, in line with Section 189 CTA 2010.

Qualifying charitable donations can reduce a company’s taxable profits to nil but can’t create a loss. This means if a company doesn’t have sufficient taxable profits to cover the charitable donation, the tax relief may be lost.

For unincorporated businesses, where relief is not available as a deduction from trading profits, it’s possible that the sole trader or partner may be able to claim Gift Aid on charitable donations. This would depend on whether they had signed a Gift Aid declaration and paid sufficient income tax and/or capital gains tax to cover the tax recovered on the gift.

Sponsorship with benefits

If a business sponsors a sporting, cultural or similar event for promotional/publicity purposes, this would be an allowable deduction from its taxable profits. This scenario is covered in HMRC manual BIM45055.

But if the business receives something in return (such as free tickets) for the sponsorship, the value of the benefits received  would be disallowable.

However, sponsoring a community event (such as school sports teams, community organisations) is different again. As the business is less likely to receive anything in return, the promotion/publicity generated is likely to make the expenditure an allowable deduction from the taxable profits of the business.

In all cases, it’s best to look at the circumstances before deciding on the final tax treatment.