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HMRC internal manual

Business Income Manual

Specific deductions: entertainment: history

S45 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), S1298 Corporation Tax Act 2009 (CTA 2009)

Background to business entertainment legislation

Before 1965 there were no special rules relating to business entertainment and it was considered in the same way as any other business expenditure. So long as it was incurred wholly and exclusively for the purposes of the trade it would be allowed.

In the case of Bentleys, Stokes and Lowless v Beeson [1952] 33 TC 491 (see BIM37400) costs incurred by a firm of solicitors in taking clients out to lunch to discuss business were found to be incurred wholly and exclusively for the purposes of the profession and were therefore not disallowed by what is now S34 ITTOIA 2005 for unincorporated businesses and S54 CTA 2009 for companies. Any element of private or non-business hospitality was incidental to the main purpose of promoting the business. In this case, Roxburgh J said at page 493:

‘Expenditure on hospitality, coupled with advice for which a fee is charged, looks to me like expenditure for a professional purpose. It seems to me that it is no less a professional purpose merely because it involves an element of hospitality. That element does not necessarily vitiate the exclusive business purpose.’

However, by the 1960s there was a perception that business entertaining had become very lavish and that the law was being abused. This led to the introduction of what is now S45 ITTOIA 2005 and S1298 CTA 2009 (self-contained provisions applying only to business entertainment expenses and gifts). With certain exceptions these sections deny relief for ‘any expenses incurred in providing business entertainment’ by any person or by a member of that person’s staff.

The purpose of the entertainment is irrelevant. Entertaining expenditure may be incurred wholly and exclusively for the purposes of the trade or profession. However, it will still be disallowed by virtue of S45 ITTOIA 2005 and S1298 CTA 2009. Therefore, the current legislation would now disallow the expenditure in Bentleys, Stokes and Lowless.