HMRC has raised a query on your company's latest accounts regarding the tax deduction claimed for the costs of your sales campaign. It says they count as business entertainment and so aren't tax deductible. Is this correct?
On the face of it the question posed above is a simple one to answer; the cost of business entertainment isn't tax deductible except where it relates to your employees. So splashing out on wining and dining a customer isn't tax efficient, but of course that's not the primary purpose, generating more business is. Of course it would be better if a tax deduction could be claimed and one of our subscribers thought he had a plan to achieve that.
Our subscriber's scheme offered the chance to win two tickets to a major sporting event with a stopover at a nearby hotel. It was to be a simple raffle-type draw open to customers who spent more than a certain amount with them. The firm's accountant said this would count as marketing expenditure and so would be tax deductible.
What is entertainment?
Unfortunately for our subscriber, his accountant was barking up the wrong tree. HMRC isn't bothered about the label put on an expense. If the result is that the customer receives “hospitality of any kind”, to quote the tax rules, it counts as entertainment and is not tax deductible. It would be very difficult to argue that putting someone up in a swish hotel and paying for them to watch a prestige sporting event wasn't hospitality.
Tip: There are exceptions to rule. An important one is that where hospitality is offered to the general public as part of an ad campaign a tax deduction can be claimed.
Not open to the public
Our subscriber argued with HMRC that the open-to-the-public exception applied to his raffle prize because anyone could become a customer of the firm and enter the draw. Unfortunately, the tax inspector handling the enquiry didn't fall for it on two counts. Firstly, our subscriber's company is a trade wholesaler and the general public can't do business with it direct. Secondly, the draw was restricted because it required a customer to spend over £300 before they could be included. Ironically, the condition actually turned out to be a saving grace for the scheme.
Quid pro quo
By definition, providing hospitality is giving something for nothing. If you have to pay or give something in exchange, provide a quid pro quo as HMRC puts it, it's not hospitality it's a trade, and where an arrangement is a trade any costs associated with it are tax deductible. The courts have confirmed this point and HMRC acknowledges and accepts this in its internal guidance manuels.
The requirement that a customer had to spend £300 to enter the prize draw was a clear quid pro quo. So after speaking to us our subscriber was able to direct the inspector to HMRC's online guidance. Naturally, the inspector was happy to concede the tax deduction.
The next step
The cost of business entertainment, except that for employees, is not tax deductible. However, where the recipient, e.g. a customer, has to provide something in exchange, the arrangement is that of a trade and not entertainment. Therefore, the related costs are tax deductible.