The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:
When preparing tax computations, gifts and entertaining expenditure should always be analysed to ascertain the extent to which expenditure is allowable or disallowable. The tax computation should include clear descriptions and breakdowns of expenditure. Where expenditure has been allowed, consider whether any additional explanation should be included to minimise the risk of HMRC opening a compliance check.
In addition, clients may be grateful for some explanation of the rules, for example during year-end planning, to help them to understand the added tax cost of disallowable business entertainment expenditure. In terms of accounting procedures you should also suggest (if this is not already in place) that employee entertainment expenses with no business entertainment element and customer entertaining are charged to separate expense accounts. This will be helpful in streamlining the tax compliance process and for management accounts purposes.
Expenditure on 'business entertainment' is specifically disallowed as a deduction from trading profits, unless the expenditure is made in the ordinary course of a company's trade of providing entertainment. In addition, capital allowances are restricted in respect of assets used for the purpose of business entertainment.
Business entertainment broadly means provision of entertainment or hospitality to almost any third party, including intermediaries and professional advisers. In practice the scope of the provisions relies heavily on HMRC guidance and the key sections are summarised in this guidance note.
Several VAT cases have considered the meaning of business entertainment in the context of the VAT rules regarding business entertainment costs. Whilst not being of direct application, VAT decisions can be persuasive or assist in interpretation in respect of income and corporation tax. HMRC guidance outlines some of the principles that have been established and its interpretation. These include:
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