Client entertaining: what's allowable and what isn't

The short answer

HMRC splits entertaining into two groups: people who are not your employees (clients, prospects, suppliers, introducers) and your own staff. The tax result is very different for each.

• Client entertaining: not deductible for corporation tax, and VAT is blocked for UK clients and for overseas contacts who are not customers.
• Overseas customers: VAT may be recoverable if the entertaining is for business purposes and reasonable in scale and character, but a private benefit to the guest can cancel the reclaim.
• Staff entertaining: deductible for corporation tax and the VAT is generally recoverable, unless it is only incidental to entertaining clients.
• Annual staff party: tax-free for employees if it costs £150 a head or less and is open to staff generally.
• Small gifts to staff: tax-free as a trivial benefit if each costs £50 or less and meets the other conditions.
• Small gifts to clients: deductible only if they cost £50 or less per recipient per year, carry a conspicuous advert for your business, and are not food, drink, tobacco or vouchers.

Corporation tax: why client entertaining is not deductible

HMRC's Business Income Manual says expenditure on business entertainment or gifts is not allowable as a deduction against profits, subject to certain exceptions, even when it is a genuine business expense. So a client dinner, theatre tickets for a prospect or a corporate hospitality box all go through the accounts but are added back when the company's taxable profit is worked out.

Business entertainment means hospitality provided free of charge to people who are not employees. That covers food and drink, accommodation, tickets to shows and sporting events, and similar treats. Where an employee comes along to look after the guests, their share is part of the client entertaining too.

HMRC's test for a mixed event is whether the employer would have paid for it if no guests had been present. Its own examples: an employee's free canteen lunch stays allowable even if a customer joins them (only the customer's lunch is disallowed), but if the employee takes the customer to a restaurant, the whole bill, for both of them, is business entertainment and not allowable.

Corporation tax: staff entertaining is allowable

Entertaining your own employees is an exception to the block. A team dinner, a summer barbecue or a Christmas party for staff is normally a deductible cost, provided it is not incidental to entertaining clients.

Some staff entertaining is deductible for the company but still taxable for the employee. HMRC's example is a golf club subscription paid for an employee: the company can deduct it, but it must be reported as a benefit on form P11D.

VAT: when you can and cannot reclaim it

VAT Notice 700/65 (last updated 3 June 2026) sets out the rules. Input VAT on business entertainment is generally blocked. That includes entertaining UK business contacts and non-UK business contacts who are not customers.

Staff entertainment, such as parties and team-building events, is treated as being for business purposes, so the VAT is generally recoverable. Where an event mixes staff and guests, you can only reclaim the share of VAT that relates to employees. The share for non-employees is blocked.

Subsistence for employees working away from their normal place of business is not business entertainment, so these restrictions do not apply to it. The normal VAT rules in Notice 700 apply instead.

VAT: the overseas customer nuance

Entertaining overseas customers is not caught by the block. HMRC says VAT may be recoverable if the entertaining is for business purposes and is reasonable in scale and character.

There is a catch. If the guest enjoys a private benefit, an output tax charge arises that cancels out the VAT you reclaimed. HMRC says a private benefit is usually present. It can be ignored only where the spending is necessary and strictly for business purposes. Hospitality offered to be polite, because it is expected, or to improve relationships does not meet that test.

In practice, HMRC's VAT Input Tax manual says basic refreshments in your office during a meeting are unlikely to trigger a charge, while taking a customer to a restaurant very likely will. Golf days, sports trips, evening meals and nightclub outings usually lead to an output tax charge. The overseas rule is about customers: an overseas supplier or partner who is not a customer is treated like a UK contact.

The annual staff party: £150 a head

Employees pay no tax on an annual party or similar yearly function, such as a Christmas party or summer barbecue, if the cost is £150 a head or less. HMRC's conditions are set out in EIM21690.

• It must be open to employees generally, or to all employees at one location if you have several sites.
• It must be annual. A one-off event, such as an anniversary party, does not qualify.
• Work out the cost per head by dividing the total cost, including VAT, transport and any overnight accommodation, by everyone who attends, including partners and other guests.
• If you hold more than one annual function, add the per-head costs together. If the total goes over £150, the events that make best use of the £150 are exempt and the rest are taxable.
• The £150 is not an allowance. If an event goes over, the whole cost per head is taxable, not just the excess.
• A virtual event can qualify if the other conditions are met.

Trivial benefits: small treats for staff

A small gift to an employee, such as a bottle of wine, flowers or a takeaway, is tax-free as a trivial benefit if it costs £50 or less, is not cash or a cash voucher, is not a reward for work or performance, and is not in the employee's contract.

If it qualifies, there is no tax or National Insurance and nothing to report. Directors of close companies (broadly, a company run by five or fewer shareholders) are capped at £300 of trivial benefits in a tax year. Trivial benefits given through salary sacrifice are not exempt.

Gifts to clients

Corporate gifts are usually disallowed for corporation tax, with one main exception. A gift is allowable if it carries a conspicuous advert for your business on the gift itself (not just the wrapping), is not food, drink, tobacco or a voucher, and the total of such gifts to the same recipient is no more than £50 in the accounting period.

So a branded notebook or umbrella can qualify. A hamper, a case of wine or a gift card will not, however it is branded.

P11D and reporting

Entertaining that falls outside an exemption, such as a staff event over £150 a head or a club membership paid for an employee, is usually a taxable benefit. You report it on form P11D and pay Class 1A National Insurance on it, unless you payroll the benefit.

For the tax year that ends on 5 April, the P11D and P11D(b) are due by 6 July. Class 1A National Insurance must be paid by 22 July (19 July if paying by cheque). From 6 April 2027, mandatory payrolling begins for company cars, car fuel, vans, van fuel and medical benefits, with most other benefits following from April 2028, according to HMRC's July 2026 policy paper.

Good records save arguments

• Keep the itemised receipt, not just the card slip.
• Note who attended, which company they are from, and whether they are a customer.
• Record the business reason for the event.
• For mixed events, record headcounts for staff and guests so you can split the VAT.
• Code client entertaining and staff entertaining to separate nominal codes in your accounts.

VAT on gifts to clients: a separate £50 test

The VAT rule on business gifts is not the same as the corporation tax rule. HMRC's Notice 700/7 says you do not have to account for VAT on business gifts to the same person if the total cost of the gifts is £50 or less, excluding VAT, in any 12-month period that includes the day of the gift.

If the gifts to one person go over £50 in that period and you reclaimed the VAT when you bought them, you normally have to account for output VAT on the cost of all of them, not just the excess. The VAT test is about cost, not branding, so a gift that is disallowed for corporation tax, such as a hamper, can still fall within it.

If a VAT-registered client uses your gift in their business, they can usually reclaim the VAT you accounted for. You cannot issue a VAT invoice for a free gift, but HMRC says you can use your normal invoice with a statement headed "Tax Certificate" saying no payment is necessary.

Staff gifts: the details that catch people out

Gifts to your own employees are an exception to the gifts block for corporation tax, so long as they are not incidental to gifts to other people (BIM45065). For the employee, the trivial benefit limit has three details worth knowing, all from HMRC's manual at EIM21865.

• The £50 is measured including VAT. For VAT on client gifts the £50 is excluding VAT, so the two limits are not the same number in practice.
• It is a cliff edge. If a gift costs more than £50, the full amount is taxable, not just the excess over £50.
• For a group gift where the exact cost per person is impracticable to work out, such as a team lunch delivered to the office, you can use the average cost per person.

If a staff gift or event is taxable: PAYE Settlement Agreements

If a gift or event falls outside the exemptions, you do not have to put it through payroll or a P11D. A PAYE Settlement Agreement (PSA) lets the employer make one annual payment covering the tax and National Insurance on minor, irregular or impracticable items, so the employee is not taxed on a thank-you.

GOV.UK lists small gifts and vouchers, and staff entertainment that is not exempt from tax or National Insurance, among the items a PSA can cover. Items in a PSA do not go on a P11D, and the employer pays Class 1B National Insurance instead of Class 1A. Wages, cash bonuses and high-value benefits such as company cars cannot go in one.