Rules on Entertainment Deductions

Sally Charlesworth
May 11
2 min read

⭐ 1. Employee-only Entertainment – Generally Tax Deductible

The cost of entertaining employees (staff) is a tax deductible business expense, provided the expenditure is wholly and exclusively for business purposes and not merely incidental to entertaining others such as clients or suppliers. Examples include:

Staff Christmas parties
Team-building events that are genuinely for employees
Sporting or social events solely for staff

This exception to the general ban on entertainment deductions applies under the Corporation Tax and Income Tax rules because the legislation specifically excludes employee entertainment from being disallowed, so long as it meets the criteria above.

Key points:

It must be genuinely for employees.
If non-employees are present and the event’s main purpose switches to business entertainment, the deduction position changes.

🚫 2. Client or Third-Party Entertainment – Not Tax Deductible

Costs of entertaining clients, customers, suppliers, or any non-employees are generally disallowed for tax deduction purposes. This includes:

Taking a client out for lunch/dinner
Hosting a corporate box at a sports event for potential customers
Hospitality such as golf days, entertainment tickets, etc.

Even if the purpose is to cultivate or maintain business relationships, HMRC treats this as entertainment that cannot be deducted against profits.

🔄 3. Employee Entertaining that Is Incidental to Client Entertainment

If the employee’s participation in an event is incidental to entertaining a customer, the whole cost may be treated as disallowed business entertainment. For example:

An employee accompanying a customer to a restaurant meeting
A staff member bringing a client to an awards evening

In these cases, the primary purpose is not staff entertainment alone, so the costs can’t be deducted. Determining whether something is “incidental” depends on whether the employer would have paid for the event if the non-employee were not present.

🧾 4. Travel & Other Costs Connected with Entertainment

Travel and other costs which are incidental to entertainment (e.g., taxis, bringing someone to an event) are not deductible if the main purpose is entertainment. If travel is genuinely for business and not part of entertaining, it may be deductible as a separate business expense.

🧮 VAT Treatment (Related, but Important)

It’s useful to know the VAT angle:

VAT on employee-only entertainment (e.g., staff parties) can be reclaimed as input tax because the supply is for business purposes.
VAT on business entertainment for non-employees is not recoverable.

📌 Practical Examples

Scenario	Deductible?	Comments
Annual staff Christmas party with only employees	✅	Allowed if for business purpose only.
Lunch with a client and employee	🚫	Staff cost incidental to client — not deductible.
Tickets for clients to a show	🚫	Non-employee entertainment — disallowed.
Team-building event for staff and their families	⚠️	If non-employees’ presence alters nature, deduction may be limited. HMRC would scrutinise.

✍️ Record-Keeping Tips

To support a deduction:

Clearly document who attended (e.g., employees only vs employees + clients).
Record the business purpose (e.g., team morale, reward objectives).
Separate staff entertainment costs from client hospitality in your accounts.