Client & business entertainment

Conditions

• Business entertaining is disallowed under s45 Income Tax (Trading and Other Income) Act 2005 for sole traders and partnerships, and under s1298 Corporation Tax Act 2009 for companies. The disallowance is absolute — there is no threshold, no partial relief, and no 'it was clearly for business' exception. A meal to discuss a contract is just as disallowed as a purely social dinner.
• The legislation defines entertainment as 'hospitality of any kind'. This covers meals and drinks with clients, restaurant bookings, hotel costs, tickets to sporting or cultural events, corporate hospitality boxes, golf days, and similar. Both UK and overseas entertainment is caught.
• For a limited company, the cost is incurred through the business and appears in the accounts — but it is added back in the corporation tax computation. The company bears the cost with no tax relief.
• A sole trader or partner records the expenditure but disallows it in their profit calculation for income tax purposes.
• An employee entertaining clients cannot deduct the cost personally. The 'wholly, exclusively and necessarily in the performance of the duties' test in s336 ITEPA 2003 is not met for entertainment, and even if it were, the specific entertainment disallowance in the employment context applies.
• The host's own meal or drinks at the same event are not separable. HMRC does not permit apportionment of a client entertainment bill to extract the host's personal share — the entire bill is treated as entertainment and disallowed.
• Staff entertaining — providing hospitality exclusively to employees — is not subject to the same disallowance (BIM45025). But if employee entertaining is incidental to a client event (e.g. employees accompany clients to a corporate box), the employee costs are also disallowed.
• Small branded gifts below £50 in value that are not food, drink, tobacco, or vouchers may qualify as promotional expenditure — but a gift combined with hospitality or a meal remains entertainment.

Common mistakes

• Assuming a client lunch is deductible because the conversation was entirely about business — the purpose test does not override the statutory disallowance.
• Trying to claim just 'your share' of a restaurant bill when a client is present — HMRC does not accept apportionment of client entertainment costs for direct tax purposes.
• Confusing the disallowance of client entertainment with the rules for staff entertaining, which is generally allowable as a business cost (subject to benefit-in-kind rules for employees).
• Recording client entertainment as 'marketing' or 'business development' in the accounts to disguise its nature — the accounting description does not change the tax treatment.

What to keep

• Keep records of all entertainment expenditure even though it is disallowed — accurate records allow the correct add-back in the tax computation and demonstrate to HMRC that the figure has been properly treated.
• A note of who attended, the business context, and the cost per head is good practice for any challenge.

Real-world example

A limited company wins a pitch and takes the new client team to a £400 celebratory dinner. The cost goes through the company accounts as a business expense but is added back in full in the corporation tax computation. The company bears the full £400 with no tax relief. If the same company then holds a team debrief dinner for its own staff only, that cost is a staff expense and is not subject to the entertainment disallowance — though the employees may need to consider benefit-in-kind treatment.

Frequently asked

Related allowances