Don’t let the taxman ruin your day out with clients!
With so many exciting events taking place what should you be thinking about when taking clients to sporting or other events and entertaining budgets?
Entertaining clients or prospective clients is a legitimate business expense and can be properly paid out of the business account.
However, you will not be able to claim tax relief for the amounts spent nor can you claim back any VAT paid. But, if there is a sponsorship element to the expenditure then the position may be more favourable.
Sponsorship is a way for businesses to obtain the commercial benefit of bringing their name, products or services to public attention. In effect, a business tries to obtain benefits for its products, goodwill or reputation and public image by association with a popular or successful event.
Sports clubs and cultural venues typically offer a range of options for potential sponsors. These include:
- corporate sponsorship packages, often advertised on the club or venue website,
- sponsoring individual productions, players or races,
- long term deals such as sponsoring a football club.
These packages may include both advertising (for example in the event’s programme, on clothing, at the venue, through to the name of the event) and hospitality. The hospitality may simply be a certain number of tickets or it may include meals or access to hospitality boxes.
Sponsorship costs are allowable in arriving at the profits of a trade or profession except where they are:
- capital expenditure, such as a contribution to a permanent exhibition or the purchase of a racehorse or car
- expenditure not made wholly and exclusively for business purposes, such as where the sponsored person is a close friend or relative of the business owner, or the business owner has a personal involvement in the sponsored activity
- expenditure which is specifically disallowed (such as any entertaining expenditure)
If the expenditure can be treated as sponsorship related then full tax relief can be claimed in the business accounts and you can claim back any VAT paid on the expense.
What can clients do to ensure that sponsorship payments stand the best chance of achieving a deduction for tax purposes?
The following steps should help to provide evidence that the payments do not fall foul of the wholly and exclusively rule:
- If making, or thinking of making, sponsorship payments a business should engage in a formal review to itemise the benefits that should accrue to it in exchange for the payments.
- A clear business case needs to be made for the sponsorship payments before they are made.
- The board should document discussions, board meeting, etc, and consider drawing up a formal report for the business’s management to consider.
- Wherever possible, a formal sponsorship agreement should be drawn up showing what the business receives for its expenditure and what its commitments are over the period of the agreement, which should be time limited, not open-ended.
- Formal invoices should be raised for the services provided for the payments.
- The documents should show that the quantum of the sponsorship payments is not being directly influenced by the needs of the recipient enterprise. The amounts being paid must relate to the cost/benefit position of the payer.
- If some aspects of a sponsorship payment are considered to be suspect, identify them and consider whether they can be separately invoiced.
What happens if you take staff along to corporate events?
All business expenditure relating to staff is tax deductible provided it is incurred wholly and exclusively for the purposes of the trade. However if you’re not careful your staff, or indeed yourself if you are a company director, could end up with an income tax or national insurance bill for a perceived benefit in kind where the amounts spent are not specifically exempted.
The following staff entertaining costs are not taxable on the employee:
- Costs relating to an annual event or events where the cost per head, including staff partners, does not exceed £150 per year.
- Costs spent on trivial benefits of up to £50 a time. This cannot be on cash or vouchers convertible to cash, nor can it be part of a regular pattern of gifts. It does however cover other ad hoc gifts and entertainment costs, provided the costs across the whole workforce do not exceed £50 per head on average. For directors there is an annual limit of 6 times that the exemption can be applied.
- Costs incurred when employees entertain clients themselves, although such expenditure is not tax deductible for the business, not even the employee-related element.
In conclusion the tax position surrounding entertainment and sponsorship events is complex and it is always better to seek advice before incurring expenditure if you have any doubt about the tax treatment. Feel free to contact Jan Friend if you have any specific queries.
The content in this blog is correct as at 23rd October 2018. See terms and conditions.