Business entertainment

[Terry Wainwright]

I understand that business entertaining is not a valid expense.

Is it legal though for a director to decide to use company money to pay for business entertaining whenever he decides though? Other than perhaps to shareholders, would he have to justify each decision to anybody?

Given that it has no effect on a company's tax position, presumably HMRC would be uninterested in how much entertaining is being done, and would be uninterested in the receipts if they are not being used to claim relief?

Aside from those serious questions, to which I'd be grateful for opinions, would there actually be any potential ramifications to a director letting the company pay for taking his wife to a local restaurant every week, or covering his rounds in a pub?

 

[David Griffiths]

Your final paragraph has hit on the snag raised in the previous one. As long as there is actual business entertainment, HMRC won't be too concerned. If they get wind of the fact that the expenditure is not genuine business entertainment but is really for your benefit they will start digging deeper, and could well assess the expenditure as a benefit in kind on you.

It would then become tax deductible for the company, but your tax bill could be more than the company's saving, and there would be class 1A NIC payable as well, not to mention interest and penalties.

As a general rule, work on the basis that if you've thought of a jolly little wheeze like getting the company to pay for family meals or for rounds of drinks, then somebody else will have thought of it before - and of course been found out.

 

[Terry Wainwright]

Thanks David. Going back to genuine entertaining, with a large variety of clients and/or potential clients, and records of names & contact details kept, would HMRC have a right to interfere? For example, is it a company's choice what proportion of its cash is on entertaining, and would HMRC try to set a limit?

 

[Pish_Pash]

I understand that business entertaining is not a valid expense.

Is it legal though for a director to decide to use company money to pay for business entertaining whenever he decides though? Other than perhaps to shareholders, would he have to justify each decision to anybody?

Given that it has no effect on a company's tax position, presumably HMRC would be uninterested in how much entertaining is being done, and would be uninterested in the receipts if they are not being used to claim relief?

I'm not an accountant, but curious how paying for anything on the company would not affect the company's tax position? To my (layman's) eye....anything that 'costs' the business (business entertainment or otherwise), reduces the company's profit & therefore reduces corportion tax liability?

Or am I missing something?

 

[UK Contractor Accountant]

If you have your own company (director+shareholder) you can put through what you like -school fees, holidays, restaurant bills, show/event tickets etc.

It's the tax treatment of the expenditure that needs to be established. Normally this is left to the Accountant at the year end to sort out.

Some expenditure might end up the Directors Loan Account others might be shown as a company cost which may be tax deductible and others might be allowed for the company and shown on a P11d form.

 

[David Griffiths]

Or am I missing something?

that the expenditure on entertaining cannot be deducted from the profits for corporation tax purposes

 

[Pish_Pash]

that the expenditure on entertaining cannot be deducted from the profits for corporation tax purposes

So where did the money come from to pay for the meal? If it came from the company coffers ...how do you account for it?

(I'm serious - not trying to be clever .....I am clearly missing an important element of accounting here!)

 

[Scalloway]

The payments go through your accounts like any other payment. It is sensible to put them to a heading that makes it obvious so the accountant picks it up at the end of the year and takes the appropriate action so that it is not deducted from taxable profits when tax is calculated.

 

[Pish_Pash]

I guess what I'm struggling here with is how can such payment be made & not impact your profits?

if the payment is not entered into accounts software as an expense...then what is it entered in there as? (again, serious question!)

 

[Bob]

Gross Profit £100
Meals £30
Net Profit £70

Corporation tax liability is based on Gross Profit of £100 as meals not deductible for tax

If £30 had been spent on tax deductible expense e.g. advertising instead of non deductible cost of meals then corporation tax liability would have been based on £70 and not £100

I. E. the only impact is on the calculation of the quantum of your corporation tax liabiliry

 

[Pish_Pash]

Thanks but I'm still puzzled how that would be entered it into accounts software ...as in what's the double entry here?

 

[kevin.doran]

Thanks but I'm still puzzled how that would be entered it into accounts software ...as in what's the double entry here?

What goes into the 'books' and how the taxable profits are calculated are two completely different things. If for instance you're looking at your P&L net profit figure you would then 'add back' the likes of entertaining and depreciation when working out how much tax to pay. The tax calculation itself is done outside of the accounts via a tax computation.

It's nowhere near as simple as letting the client use a piece of software then copying the figures into a set of accounts.

 

[Ian J]

The OP has specifically been talking about a director's entertaining expenses but for tax purposes the same applies to any employee's entertaining expenses too as they are not allowable against tax.

 

[The Byre]

What goes into the 'books' and how the taxable profits are calculated are two completely different things.

This!

Putting bogus expenses through the company is to misappropriate company funds and can be a criminal offence.

Think of it this way - having an open day and providing your guests with free booze and food is a perfectly legitimate expense. Taking your wife/husband out for a jolly is definitely not!

Tax inspectors use a tool that many owners of small businesses fail to use and they sometimes use it with devastating effect. It's called common sense.

 

[David Griffiths]

Thanks but I'm still puzzled how that would be entered it into accounts software ...as in what's the double entry here?

The double entry is the same as any other expense and the accounts filed for tax are the same as those given to the members or (abbreviated) filed at Companies House. There is a separate tax computation so the taxable profit is higher than the accounts profit.

That could mean that a company with profit of £10,000 that has spent £2,000 on disallowable entertaining pays tax of £2,400 instead of the £2,000 that you might expect