Excuse my ignorance new to all this. My boss (a director of the business) has purchased a season ticket costing £2193, he takes prospective clients, suppliers and customers to the games. Can this be justified as entertainment, and I know I cannot claim the VAT so is it classed as outside the scope.
Yes, it can be classed as entertainment but you need to make a note of any games (for my boss it is often over Xmas etc) where he takes family/friends instead of clients.
Ensure though that the client realises that entertainment is not tax deductible and would need to be added back in a similar manner to depreciation when calculating taxable profit.
As noted above by Julie personal usage will also make it a P11D item so bit of a double whammy on the tax front.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi. I am quite confused by this and following is a genuine wish to better understand. Sorry if I have misunderstood (always seeking the certainty of black and white).
Are we saying that entertaining clients is an allowable/justifiable business expense? I thought it wasn't - ever! (but I am still learning - am I totally wrong?). I have, in the past, been told by an accountant to "put it through anyway, but it will be added back on again at year-end". But in general bookkeeping, I have told clients that they can't claim for buying lunch for their clients. Have I been wrongly advising them???
If it is not allowed for tax, is there any advantage to be gained by posting an "Entertainment" expense to the books? Wouldn't it be better just to disallow in the first place? Or does it require an amount of discretion such that it's best left to the year-end accountant?
It depends if you keep accounts just to keep the tax man off your back, or to help run your business. It's a cost of doing business, as you need to entertain to make sales, so to get a true picture of what it costs to run your business you need to record it. Otherwise you are getting a misleading view of what it costs to make sales, and may be pricing jobs wrongly, or even making a loss on them. It's just that you don't get any tax relief on it.
My attitude to accounting is that it helps you to run your business, and as an added advantage, it keeps you out of jail by keeping the tax man off your back .
advantage is that you don't pay NI on the expense.
disadvantage is that it is non tax deductible for the business and could be a P11D item.
I consider it better to disallow completely not least as the real issue is that because they pay for entertainment through the business business owners think that such expenditure is being subsidised by the taxpayer where the reality is that they are taxed on anything that they spend this way so we generally try to discourage them from such expenditure.
Just to emphasise the specific point raised, clients lunch costs are not claimable expenditure (there is an exception for foreign clients) and even if a director travels and seperates out their own meal, such is not subsistence but rather incidental to the entertaining so otherwise allowable subsistence would be disallowed (see BIM45020 here : www.hmrc.gov.uk/manuals/bimmanual/BIM45020.htm).
That seems to have just spent rather a lot of words to tell you that the advice that you have been giving to date has been correct and that your appriasal of entertaining expenses is spot on.
HTH,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Oops, crossed in the post as I was off trying to find the right paprgraph in the legislation.
I like Johns explanation of it.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thanks Shaun. Yes, it helps a lot. And thanks for the links, I've been searching internet for ages and couldn't find the official guidance. I was considering the possibility of getting around it by each party paying for their own "subsistence" (came across it in my internet searching) but I can see that wouldn't be allowed either.
John has really hit the nail on the head. It is amazing how many clients, and even bookkeepers prepare accounts purely for tax purposes. Accounts should be a measure of the business income and expenditure for the year.
The reason entertaining goes into a set of accounts is because to the business owner it is a cost of doing business. It is therefore a measurable item and should be included as such. The taxman then decides this is not allowable and therefore we adjust the profit, via the tax computation, to get the correct taxable profit!
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Phil Hendy, The Accountancy Mentor
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I started off with a "proper" job in industry, where we made and sold things, and tax was something dealt with by the auditors, who we regularly took out to lunch to divert them from things we didn't want them to delve too deeply into! That was a long, long time ago though! Tax has always been just a necessary evil to me! I've always wanted to help people by providing them with useful information.
Thank you very much for your insights. I have taken on board that it's important and helpful for the business to know how much it spends on entertainment as well as keeping the tax man happy.
Could I add another point for consideration? Supposing a small/new business was trying to become established and needed to present their mid-year "Accounts" to some stakeholder(s) to show that it was becoming viable. Would you want this expenditure to be recorded, thereby reducing profits, or would you consider advising the client to omit it in these circumstances?
Similarly, with the same scenario in mind (presenting mid-year accounts to bank manager), I asked a question here recently and was very happy to receive an answer (thank you, you know who you are ). I know this doesn't make a difference to year-end, so this is just mid-year. If a sole trader regularly moves money in and out of his business, would you keep allowing the Drawings to get bigger and bigger, while allowing Capital Introduced to get bigger and bigger? Or, would you ever consider crediting the Drawings (which would be a truer picture of the affairs of the business)? Not that I have ever seen it done this way, I just wondered if you might, in certain circumstances.
Sorry if this seems so simple but I'm still at the stage where I'm always considering hypothetical scenarios and their implications, and every answer just seems to throw up more questions.
Thank you very much.
Hope everyone is getting a bit of sunshine and enjoying a lovely day.
Another point on whether to put the entertainment through the books is that if you do (which I think we are all agreed we should) then the expense can be paid for by the business and does not need to go through the DLA (and if omitted altogether will just come out of the directors personal funds).
I personally think you should be looking to show as true a picture of the accounts as possible. If you include some expenses in one report and not in another then you are certainly mis-leading those stakeholders.
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Phil Hendy, The Accountancy Mentor
Are you thinking of setting up your own practice or have you set up and need some help?
If so a mentor may be the way forward - feel free to get in touch and see how I can assist you.
HellsBells wrote:Could I add another point for consideration? Supposing a small/new business was trying to become established and needed to present their mid-year "Accounts" to some stakeholder(s) to show that it was becoming viable. Would you want this expenditure to be recorded, thereby reducing profits, or would you consider advising the client to omit it in these circumstances?
Similarly, with the same scenario in mind (presenting mid-year accounts to bank manager).....I know this doesn't make a difference to year-end, so this is just mid-year.
Would you be happy if you were supporting a business, and discovered that some of the costs necessary to run the business were omitted from the figures you were given?
And it does affect the year end too. Entertaining may have to be removed from the figures on your tax return, but it should still be included in the accounts you present to anyone else, such as advisers and investors, and that you use for decision making. Otherwise they don't give a true and fair view of the business.
I think the same applies to depreciation too, and any other figures you have to adjust or present in a particular way in your tax return. It's simple enough to do a reconciliation between your true profit, and your taxable one.
Could I add another point for consideration? Supposing a small/new business was trying to become established and needed to present their mid-year "Accounts" to some stakeholder(s) to show that it was becoming viable. Would you want this expenditure to be recorded, thereby reducing profits, or would you consider advising the client to omit it in these circumstances?
Hel
Hi Hel
As an ex Corporate financier I would say keep your management accounts as close as they can be to what will finally spew out at the end of the year as my lot would go through them with a fine toothcomb, comparing actuals to managements and to budgets and quizzing the client on differences. But also eg asking them to justify any 'high' entertaining costs (etc). Couldve been a subjective issue as what could be considered 'high', but if someone like me was trying to get you your client his finance then its all fair game, including if they strip out all of the profits every year so they dont let the reserves build up.
Saying that - in the last 14+ years of my career it was mid and large corporates - so anything £25/£75m + turnover, but the principle was the same when I worked in the commerical/business sector earlier in my career - doesnt matter how many 000's are on the end.
One of mine seemed to think nothing of spending £800+ on a meal for four, which was I felt taking the proverbial.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
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