Business expenses

Usually, expenses incurred by a company are tax deductible from its profits as long as they are “wholly and exclusively for the purpose of the trade”. One important exception to this rule is business entertainment . Even though it might be an expenditure for the benefit of your company’s trade it is specifically excluded.

Tip. An exception to the rule is made for expenditure on entertaining employees and directors (staff). The cost of entertaining them is tax deductible for the company.

How much can you spend?

Your company can be as lavish as it likes with its staff entertainment, and there’s no cap on the amount which can qualify for a tax deduction. However, the wholly and exclusively condition could be a problem. HMRC can deny a deduction for expenditure that is disproportionately high so that it can’t be said to be “for the purpose of the trade”. It’s really just a means of getting the company to pay for a private jolly.

Taxable and not deductible

It’s usually assumed that if a director or employee is taxable on benefits in kind it’s part of their remuneration for their job and therefore the cost to the employer of providing it is automatically a tax- deductible expense. That’s a fallacy. While salaries, benefits etc. are liable to tax as employment income of the recipient, this doesn’t impact on the wholly and exclusively rule, which operates independently. HMRC’s view is that excessive salary etc. has a non-trade element and so the excess doesn’t pass the wholly and exclusively test (see The next step ).

Example. Acom Ltd is owned and managed by Gary and his spouse. They have an adult son at university who works several hours a week for the company doing odd jobs in the holidays. To help his son Gary arranges for Acom to pay him a wage of £1,000 a week which is subject to PAYE tax and NI. This equates to about £200 per hour. Clearly, the motive for such a high wage is because of the personal relationship between Gary and his son and very little to do with the latter’s input into Acom’s trade. HMRC might accept around £15 per hour as tax deductible, not the remainder.

Tip. Excessive salary or benefits in kind aren’t an issue where the person being paid or provided with the benefit is a “controlling director” of the employing company. HMRC is very unlikely to argue about the cost to the company not meeting the wholly and exclusively test (see The next step ).

Trap. Where a company incurs expenditure on entertaining a director or employee it’s a taxable benefit. The only exception is annually recurring entertainment, e.g. a Christmas party, which isn’t taxable unless the cost per tax year per head exceeds £150.

Tip. Where the entertainment is a taxable benefit for directors who are also shareholders, it’s usually more tax efficient for them to take an extra dividend and pay for it out of that than for the company to pay for it direct.

If the entertainment provided is not disproportionate the company can claim a tax deduction for it. However, as a one-off event it counts as a taxable benefit in kind for each director. For directors who are also shareholders they would be better off taking an extra dividend and paying for the event personally.