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HMRC internal manual

Business Income Manual

Specific deductions: entertainment: meaning of business entertainment: contractual obligation

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

Entertainment supplied under a contractual obligation is not disallowed by the above legislation.

If a trader has a contractual obligation (an obligation that requires the other party to provide something of value in return) to provide hospitality this will not normally fall within the definition of business entertaining. As long as the obligation is genuine and the trader can demonstrate a full and direct return for the entertainment the legislation does not disallow the expenditure.

Most commonly this will arise where goods or services are sold to customers for payment, or where hospitality is provided as part of a package of services for which payment is received (see BIM45030).

However, contractual obligations also occur in other circumstances. In the case of Celtic Football and Athletic Co Ltd v Customs and Excise [1983] STC 470, a football club was obliged by the rules of UEFA (the European football union) to pay for the food and accommodation needs of the visiting team whenever there was a two-legged fixture. In the same way, the visiting team would provide Celtic with food and accommodation on the return match.

The food and accommodation provided were held not to be business entertainment for two reasons:

  • they were not ‘free’ to the recipient, who was obliged to provide hospitality on a reciprocal basis, and
  • the fact that Celtic was obliged by a third party (UEFA) to accommodate the visiting players removed the gratuitous element which is characteristic of hospitality. Lord Avonside described it like this:

    ‘…if I entertain a person, or give a person hospitality, I do so on my own volition. I do not wish or ask payment from the person whom I entertain, nor do I expect that that person must entertain me in turn or be under any form of compulsion to do so.’

In a case like this, the expenditure incurred only falls outside the definition of business entertainment if it forms part of a genuine obligation, containing elements of both compulsion and reciprocity. By way of contrast to the Celtic case, hospitality given under an informal arrangement by which a trader receives accommodation when visiting suppliers, and in turn provides accommodation when visited by the suppliers’ own staff is non-allowable business entertainment. This is because there is no formal obligation and because it is unlikely that there will be an exact match between hospitality given and hospitality received (that is to say, it is not a fully reciprocal arrangement).