Severn Accounting
Tax & Accounting

Business entertainment – usually not allowable – but when can you

By Ali Jaw ·

HMRC’s rules state that expenditure on business entertainment or gifts cannot be claimed as a deduction against profits (and therefore also non-VAT deductible), even if a genuine expense of the trade or business. However, there are important exceptions to this rule that many business owners overlook. Understanding when you can claim relief can save your company thousands in unnecessary tax bills. In this guide, we’ll explore the grey areas and clarify exactly which entertaining and gift expenses HMRC will allow.

Why is business entertainment usually disallowed?

The disallowance of business entertainment costs dates back to a long-standing tax principle: HMRC considers entertaining clients and prospects to be a personal benefit, not purely a business expense. Whether you’re taking a client to lunch, hosting a corporate event, or buying theatre tickets, the enjoyment element means it falls outside the definition of wholly and exclusively for business purposes.

This applies to most hospitality costs, including meals, drinks, accommodation whilst entertaining, and event tickets. The rule is deliberately broad to prevent businesses from disguising personal leisure as corporate expenses. Even if you genuinely discuss business matters during dinner, the entertainment element remains non-deductible under section 45(2) of the Income Tax (Trading and Other Income) Act 2005.

For VAT purposes, these expenses are also blocked from input tax recovery, meaning you cannot reclaim the VAT element either.

The key exception: staff entertainment and functions

Here’s where it gets interesting. HMRC does allow deductions for entertaining your own employees, provided the expense is reasonable and genuinely for staff morale and motivation. The most common example is an annual staff party or team outing.

The important caveat is the £150 per head annual limit for tax relief on staff entertainment. This means you can spend up to £150 per employee per tax year on entertainment without losing the tax deduction. Typical allowable expenses under this threshold include:

  • Christmas parties and annual dinners
  • Team building events and away days
  • Sports days and informal social gatherings
  • Refreshments at company meetings

Once you exceed £150 per person in a single year, the entire expense becomes disallowable. Therefore, if you host a £200 per head event, the full amount fails relief, not just the excess £50. This makes planning essential—many businesses carefully budget around this threshold.

VAT can be recovered on staff entertainment that qualifies for the corporation tax deduction, which is an additional benefit.

Gifts to customers and business contacts

If you must give gifts, HMRC allows deductions for certain types of gifts to customers, clients and business contacts, subject to specific conditions:

  • The gift must cost no more than £50 per recipient in any one tax year
  • The gift must be a tangible item (not cash or cash vouchers)
  • The gift must carry a clear business promotional message (such as branded merchandise or company logo items)
  • The gift must not be food, drink, tobacco, or a holiday voucher

Examples that typically qualify include branded pens, USB drives, desk calendars with your company logo, or branded clothing. A bespoke hamper, even a premium one, would likely fail the conditions because it doesn’t carry promotional messaging and contains consumables.

Importantly, these conditions must all be met. Missing just one—such as a £60 gift that’s otherwise branded—renders the entire expense non-deductible.

Subsistence and accommodation whilst travelling

This is an often-misunderstood area. Whilst entertaining clients is disallowable, your own subsistence and accommodation whilst travelling on business is allowable. If you stay overnight for a business meeting and require a hotel and meals, these are deductible business expenses.

The distinction is whether the journey itself is for business (allowable) or whether you’re entertaining others (not allowable). If you travel to visit a client and have a meal alone in your hotel, that’s subsistence relief. If you take the client out for dinner afterwards, that dinner is entertainment and non-deductible.

Keeping compliant records

To maximise relief where allowed, maintain detailed records: dates, attendees, business purpose, and the amount spent. For staff parties, keep an attendee list. For gifts, record the recipient, cost, and the promotional message or branding. HMRC may enquire into entertainment expenses, particularly if they seem generous, so contemporaneous documentation is essential.

Conclusion

Business entertainment remains a minefield for many, but the rules are consistent once understood. Focus on staff entertainment within the £150 threshold, gifts with business promotion under £50, and your own business travel subsistence. When in doubt, it’s safer to assume an expense is disallowable unless it clearly falls into an established exception.

For tailored advice, contact Severn Accounting — we’re here to help.