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HMRC internal manual

Business Income Manual

Specific deductions: entertainment: exceptions: provided in the normal course of trade for payment

S46 Income Tax (Trading and Other Income) Act 2005, S1299 Corporation Tax Act 2009

Treatment of a trade that includes the provision of hospitality for payment

Goods and services sold in the normal course of trade are not business entertainment and so the costs are an allowable deduction against trading profits.

This means that a person whose business it is to provide hospitality for payment (for instance, a restaurant owner) is able to deduct the cost of goods and services so provided. However this does not apply if the goods or services are subsidised, or given away (unless for the purpose of advertising, see BIM45032).

The legislation allows a deduction against trading profits if the entertainment is of a kind which it is the trader’s trade or company’s business to provide.

It is important to note that this only applies where the goods and services provided are part of the trader’s normal trade and where payment is made for the goods and services in the normal way.

In the case of, say, a restaurant or a pub, the cost of goods sold is an allowable deduction. Special offers to the public, such as ‘two meals for the price of one’ are within the normal course of trade and so are not business entertainment. However, if a restaurateur gives free meals to selected friends or customers then the cost of the meals involved is not an allowable deduction.

Difficulties may arise where a pub offers ‘free’ refreshments for a visiting darts team, or for participants in a quiz night. In most cases, these refreshments may be regarded as merely a discount on the drinks purchased by the darts players or quiz participants and you should not regard them as business entertainment. However, any hospitality of this nature which is out of proportion to the drinks purchased means that the expenditure involved is not allowable. Nor is a deduction allowable if the hospitality is extended to people who are not paying customers.

The exception also applies to items that, while not part of the ordinary trade, are part of the service which customers expect from that particular trade. For instance, it is customary to supply customers with coffee in the hairdressers, or with refreshments at a casino. Here, so long as the expenditure is not excessive, the cost of the refreshments is included in the overall price that the customer pays.

Similarly, there are instances where a customer purchases a ‘package’ of services which includes an element of entertaining. An example of this is a residential training course that includes meals and social events. Again, all of the services provided have been paid for by the customer and there is no element of free hospitality, so the costs incurred by the provider are not disallowed under the legislation.

For guidance on the case law applicable to this exception, see BIM45031.