As a business which hosts seminars and courses, food and drink is provided as part of this during the day. A tax inspector refused to allow a tax deduction for the cost because he says that it is business entertainment. Is he correct?
Income tax, corporation tax and VAT legislation each contain a similar rule which blocks a tax deduction for ‘business entertainment’ costs. This includes hospitality of any sort. A common example is where a business provides food and drink for an individual, say a customer. However, not all such supplies are business entertainment.
The exception to the rule is staff entertainment. This cost is always tax deductible because it’s part of the cost of employing workers. However, there are usually tax consequences for the employees who are entertained.
Part of the business
The cost of food and drink is, of course, a deductible expense where it’s part of your business to provide it, e.g. a restaurant or cafe. The food is provided in the course of the business and not supplementary to it and is clearly not hospitality. The trouble is the further removed from catering your business is the more problematic claiming a tax deduction for this type of cost becomes.
Not part of the business
At the other end of the spectrum is, for example, a manufacturing company which hosts its customers. This eating out is used to promote the business but clearly is not part of it. Providing hospitality is the motive.
The business example featured in the introduction sits somewhere right in between, this is because it is part of their business to put on courses and seminars. These last between two hours and a full day (around eight hours including breaks). Tea and biscuits are provided for those on short courses and for those who attend for a full day there’s a lunch. HMRC didn’t object to the tax deduction claimed for the light refreshments but it did for the lunches, on the grounds that it was hospitality.
In practice HMRC has always accepted that the cost of light refreshments (tea, soft drinks and biscuits, etc.) at a business meeting or event is tax deductible in all circumstances except where the motive is hospitality, e.g. taking a prospective client for a drink at a café or pub.
All part of the service
The business owners response to HMRC’s argument is that they provide lunch as part of the courses that they run. While not directly connected with the services they are selling, the lunches are part and parcel of what they charge for. In essence, when customers pay for a seminar they are also paying for the food and drink, this is clearly the intention here and it would be difficult for HMRC to successfully dispute it if the case went to tribunal.
To put the matter beyond doubt, where you provide food and drink which is more substantial than light refreshment as part of what you’re selling, mention it in your advertising and invoices. It doesn’t change the facts but it does make them clearer.
In the example above, the inspector is incorrect. The cost is tax deductible because the food and drink is part of the product being sold by the business for which they are being paid. The motive and purpose is not hospitality. But to make this position clear, the business should show in their advertising and on invoices that food and drink is being provided at the seminar.