Are staff entertainment expenses tax deductible?

Staff entertainment and client entertaining have completely different tax treatments in the UK, and confusing them is one of the most common errors in business accounts.

Client entertaining (taking customers, prospects, or suppliers to meals, events, or hospitality) is specifically excluded from the list of allowable business expenses for both Corporation Tax and income tax purposes. This applies regardless of the business purpose. Even if a client dinner directly resulted in winning a contract, the cost is not deductible. There is no limit below which client entertaining becomes allowable. The disallowance is absolute under HMRC rules.

Staff entertaining and employee welfare is treated differently. Costs incurred for the benefit of employees that are genuinely for business purposes are deductible against Corporation Tax. These include: staff parties, team-building events, staff training events with a hospitality element, and routine workplace refreshments.

The most widely used and well-known staff entertainment exemption is the annual function exemption. Under this rule, a business can hold annual social functions for employees, and if the cost per head does not exceed £150, there is no benefit in kind charge on the employees and no P11D reporting required. The £150 per head limit applies to the total cost of the event divided by all attendees, including guests of employees. If the cost per head including VAT (if the business is VAT-registered, you cannot reclaim input VAT on entertainment) exceeds £150, the entire amount becomes a taxable benefit, not just the excess.

The £150 is an annual allowance, not a per-event limit. If you hold two events in the year, for example a summer party and a Christmas party, the combined cost per head across both events must not exceed £150. If the summer party costs £60 per head and the Christmas party costs £100 per head, the combined cost of £160 exceeds the exemption. In this case, only one event can be covered by the exemption and the other becomes a taxable benefit. HMRC allows you to choose which event uses the exemption.

For a sole director company with no employees, a party attended solely by the director and their family is not a qualifying staff function, as there are no other employees to make it an open event. HMRC looks at whether the event is genuinely open to all employees. A party to which all staff are invited, but where only the director and family attend because all employees chose not to come, does remain qualifying.

For sole traders, there are no staff entertainment expenses in the traditional sense unless you employ people. If you entertain yourself or your family, the cost is not deductible.

Team-building events and staff training days with a catering element can be deductible as a business expense even outside the £150 annual function exemption, provided the primary purpose is training or business benefit rather than entertainment. The catering is considered incidental in this case.

VAT treatment of staff entertainment differs from the income/Corporation Tax treatment. VAT on staff entertainment is generally recoverable as input VAT, whereas VAT on client entertainment is blocked. This means a mixed event with both staff and clients attending requires an apportionment of the VAT, with the portion relating to clients being irrecoverable.

Practically, if you want to claim maximum deductibility: keep a list of all attendees to document the per-head cost calculation; hold your main social events within the £150 annual function limit; ensure events are open to all employees; keep client entertaining and staff entertaining entirely separate in your accounting records; and never mix client costs into a staff function to try to make client entertaining deductible.

AccountsOS categorises staff entertainment and client entertaining separately, so you can see exactly which costs are deductible and which are not before your year-end accounts are prepared.