You are planning to join a local business association to help with networking and promotion. This includes access to a monthly dinner with a guest speaker. Does the business entertainment aspect affect the tax deductibility? Kenny Logan from our Edinburgh office discusses.
Quite often, business organisation meetings are also social occasions where food and drinks are served. However, HMRC won’t allow tax deductions if it even remotely constitutes business entertainment.
Whether you join with others to form an association or are signing up to an existing organisation, there will usually be costs which are paid for by members’ subscription payments. Where the club is a not-for-profit arrangement, HMRC will view its expenditure, which is paid for from subscriptions, as if each member incurred a proportion of the cost directly.
Costs the association incurs on administration such as print and hiring venues for meetings, are tax deductible because even though they are not directly related to any of the members’ businesses they have a clear business purpose. Unspent subscriptions are usually treated as if they are allocated to meet business costs and therefore won’t prevent any part of the members’ subscriptions from being tax deductible.
While not-for-profit business clubs and associations don’t have to pay tax on their subscription income, they must usually register for corporation tax.
Bearing in mind that an association’s expenses are treated as if its members had incurred them directly, you may expect HMRC to disallow part of a subscription if expenses are used by the association for non-tax-deductible costs, e.g. a purely social event such as an annual dinner. However, unless the expenditure is significant HMRC will ignore it under its guidance.
If meetings are held over, say, breakfast, HMRC might object to subscriptions being used to pay for all or part of the cost of these because they fall under the heading of business entertainment. But if all members attend every meeting, or virtually all of them, there’s no problem. Entertainment only refers to expenses incurred by one person or business in respect of another. As its the subscription that ends up covering the cost of the meals etc., there’s no entertainment involved.
If the number of members attending meetings where meals are involved varies greatly, and are funded out of subscriptions, HMRC might argue that those not attending are subsidising the cost of food and drink for others. That’s logical and therefore some of the subscriptions would not be tax deductible.
You can avoid this by getting the association to make a separate charge to cover food etc. for those attending the meeting. That way no one is paying for anyone else’s. The extra cost for each member might also be tax deductible as subsistence if they’ve travelled more than a few miles to attend.
If costs are mainly used to cover general expenses of running the association, e.g. administration costs, there won’t be a problem claiming a tax deduction. To avoid problems, the association should make a separate charge directly to attendees for food and drink so no member is subsidising another. The charge may be deductible as subsistence in the right circumstances.