I have a client that has a very successful business in The City and the vast majority of new work has been generated through recommendations and word of mouth. My client strongly believes in building solid long- lasting client relationships and they work very hard at cultivating new business relations and nurturing existing customers. Their secret is listening to customers and making a point of getting to know them and their business. The company do not advertise or spend on PR or engage in any form of social media, just lots of old fashion meetings with clients and prospects over lunch or an evening meal.
So what are the accounting and tax implications of this? My client's entertaining costs are a crucial, integral part of the business. The costs can be paid for legitimately through the business and we track the costs by customer just to gauge how much the company is spending on each client. However, the company cannot recover VAT on the costs and the cost of client entertaining is disallowed for Corporation Tax purposes. So VAT cannot be claimed on client entertaining and the cost cannot be offset against income for Corporation Tax.
Business entertainment and VAT
Generally you cannot claim back the VAT on business entertainment expenses. Business entertainment is defined by HM Revenue & Customs (HMRC) as any form of free or subsidised entertainment or hospitality.
It makes no difference whether the person being entertained is an existing customer, a potential customer or any other person who is not an employee. The following are not employees for VAT business entertainment purposes, and so if any of these are present at an entertainment or other event, it is considered to be business entertainment and you cannot claim back the VAT: pensioners and former employees, job applicants and interviewees and non-employee shareholders.
If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date. However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.
