Is Client Entertainment Tax Deductible

At Towerstone, we provide accountancy services in Bedford to local sole traders, landlords, and limited companies. We have written an article about Is Client Entertainment Tax Deductible to help you understand why entertainment is usually disallowed, and where the limited exceptions sit.

This is one of those questions I hear all the time usually after a business owner has taken a client out for lunch coffee drinks or an event and then looks at the receipt wondering whether HMRC will allow it. In my experience client entertainment feels like a grey area because it sits somewhere between business development and socialising. Unfortunately HMRC does not see it as grey at all.

I want to be clear early on because this is an area where mistakes are very common. In most cases client entertainment is not tax deductible in the UK. That applies whether you are self employed running a limited company or operating at a much larger scale. The reasons matter though and understanding the distinction between what is allowed and what is not will help you avoid errors frustration and awkward conversations later.

In this article I will explain what HMRC means by client entertainment how the rules apply in practice what you can and cannot claim and the differences between tax deductibility and VAT recovery. I will also share real world examples I see regularly and how to deal with these costs properly in your accounts.

What Counts as Client Entertainment?

Client entertainment refers to the provision of hospitality or entertainment to people who are not employees of your business. This can include existing clients prospective clients suppliers or other business contacts.

From experience common examples include:

• Taking a client out for lunch or dinner

• Buying drinks or coffee for a client meeting

• Tickets to sporting events concerts or shows

• Corporate hospitality

• Meals provided during client meetings

• Gifts that include food drink or entertainment

The key point is who the expense is for. If the hospitality is for someone who is not your employee HMRC will usually class it as client entertainment.

HMRC’s Starting Position on Client Entertainment

HMRC’s position is very firm.

Client entertainment is not an allowable expense for tax purposes. This means it cannot be deducted when calculating taxable profits for either income tax or corporation tax.

This rule applies regardless of:

• How important the client relationship is

• Whether the meeting was purely business focused

• Whether the cost was reasonable or modest

• Whether it directly led to new work

In my experience this is often frustrating for business owners because the expense clearly relates to winning or retaining business. HMRC’s view is that entertaining clients is a discretionary cost rather than something incurred wholly and exclusively for the purposes of the trade.

Why Client Entertainment Is Disallowed

HMRC disallows client entertainment because it considers it to have an element of personal or social benefit. Even if the intention is business development the recipient receives hospitality that goes beyond what is strictly necessary to perform the work.

From HMRC’s perspective allowing tax relief on client entertainment would open the door to abuse and subjective claims. Drawing a hard line keeps the rules clear even if they feel harsh.

In my experience clarity is better than uncertainty even when the outcome is not what people hope for.

Does This Apply to All Business Structures?

Yes.

This rule applies to:

• Sole traders

• Partnerships

• Limited companies

• LLPs

Changing your business structure does not change the treatment of client entertainment. I often see directors assume that because they run a limited company the rules are different. They are not.

The expense is still disallowed for corporation tax purposes.

Real World Example: Client Lunch

A common scenario I see is a business owner taking a client to lunch to discuss ongoing work. The bill might be £60 or £100 and feels entirely reasonable.

For tax purposes that cost is still disallowed. It should be added back when calculating taxable profits.

It does not matter that the meeting was productive or that it resulted in further work.

What About Prospective Clients?

The treatment is the same.

Entertaining potential clients is still client entertainment. The fact that they are not yet a client does not change the position.

From experience this catches people out particularly in sales driven businesses.

What About Overseas Clients?

Again the treatment does not change.

Whether the client is based in the UK or overseas client entertainment remains disallowable.

The Difference Between Client Entertainment and Staff Entertainment

This is where confusion often arises.

Staff Entertainment

Entertainment provided exclusively to employees can be allowable subject to certain rules.

Examples include:

• Staff Christmas parties

• Team meals

• Staff social events

These costs are usually allowable business expenses and may be exempt from tax if they fall within specific limits such as the annual staff event allowance.

Mixed Entertainment

If an event includes both staff and clients the cost must be split.

The portion relating to staff may be allowable. The portion relating to clients is not.

From experience this split is often missed or handled incorrectly.

What About Yourself as the Business Owner?

This is another common question.

If you are self employed you are not an employee. Entertaining yourself with a client is still client entertainment.

If you are a director of a limited company you are an employee. However the client element still dominates. The presence of a director does not make the cost allowable.

Is Client Entertainment Ever Allowable?

There are very limited situations where entertainment may be allowable but they are narrow.

Entertaining Employees Only

If the entertainment is exclusively for employees and no clients are involved it is not client entertainment.

Subsistence Not Entertainment

This is important.

If you incur subsistence costs while travelling for business such as meals when staying overnight or working away from your normal base these are not classed as entertainment.

For example:

• Meals while staying overnight for work

• Food purchased during a long business journey

These are allowable because they are necessary for the work rather than hospitality for others.

The distinction is subtle but important.

VAT and Client Entertainment

VAT adds another layer of confusion.

VAT Recovery on Client Entertainment

In most cases VAT on client entertainment is not recoverable.

This applies even if:

• The expense is incurred wholly for business reasons

• The business is VAT registered

• The client is overseas

HMRC blocks VAT recovery on client entertainment as well as disallowing the cost for direct tax purposes.

Staff Entertainment and VAT

VAT on staff entertainment may be recoverable depending on the circumstances. This is another reason it is important to distinguish clearly between staff and client costs.

Real World Example: VAT Confusion

I often see businesses recover VAT on client meals because the receipt looks like any other expense. During a VAT inspection this is one of the first things HMRC will look at.

If VAT has been incorrectly reclaimed it will need to be repaid with potential interest.

Common Mistakes I See in Practice

From experience the same issues come up repeatedly.

• Claiming client meals as travel subsistence

• Not splitting mixed staff and client events

• Reclaiming VAT on client entertainment

• Assuming small costs do not matter

• Believing that results justify deductibility

These mistakes are easy to make but also easy to avoid once the rules are clear.

How to Record Client Entertainment Correctly

The safest approach is to record client entertainment separately in your accounts.

Most accounting software allows you to use a specific client entertainment category. This ensures:

• The cost is added back for tax

• VAT is not reclaimed

• Records are clear if HMRC ever asks

In my experience clean records here prevent awkward explanations later.

Is It Ever Worth Challenging HMRC on This?

In my opinion no.

HMRC guidance on client entertainment is well established and consistently applied. Trying to argue that a meal or event was essential rarely succeeds.

It is better to accept the rule and plan accordingly.

Does Disallowed Mean Useless?

Not at all.

Client entertainment can still be a valuable business expense even if it is not tax deductible.

Winning a client retaining a relationship or closing a deal may be worth far more than the tax relief you do not get.

The key is to treat it as a commercial decision not a tax strategy.

Planning Around Client Entertainment

Good planning means:

• Knowing the cost is post tax

• Budgeting accordingly

• Avoiding over reliance on entertainment

• Using other allowable marketing methods where appropriate

Marketing advertising and promotion are generally allowable. Client entertainment is not.

Understanding this distinction helps allocate budgets more effectively.

The key takeaway

So is client entertainment tax deductible? In most cases no.

HMRC draws a clear line between entertaining clients and incurring necessary business expenses. While client entertainment may make commercial sense it does not qualify for tax relief and VAT recovery is usually blocked as well.

In my experience most problems arise not from the rule itself but from misunderstanding it. Once you accept the position it becomes much easier to deal with these costs properly and move on.

If you are ever unsure whether something counts as client entertainment or allowable subsistence it is worth checking before claiming it. A small clarification now can save a lot of hassle later.

Clear records clear boundaries and realistic expectations are the best way to stay compliant while still running your business effectively.

For more guidance on related topics, explore our Bedford Accounting Hub, which brings together practical advice for Bedford clients.