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HMRC internal manual

Business Income Manual

Specific deductions: entertainment: exceptions: normal course of trade for purpose of advertising to the public

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

The cost of goods or services given away as advertising promotion is allowable

The cost to a business of giving away its own goods or services for the purpose of advertising those goods or services to the public is not business entertainment expenditure.

The legislation says that expenditure will not be classed as business entertaining expenditure if the entertainment:

(a) is of a kind which it is the trader’s trade/company’s business to provide, and

(b) is provided in the ordinary course of the trade either for payment or free of charge in order to advertise to the public generally.

The first condition means that, for example, where a sweet manufacturer gives away a free sample of a new chocolate bar, the expenditure is not treated as hospitality. However, if the same manufacturer produces a special selection of sweets only to be used as gifts for customers then this is not part of the normal course of trade and the expenditure is business entertainment and is not allowable.

The second condition is that the gifts must be given with the object of ‘advertising to the public generally’. This condition will be satisfied if they are made available to the public indiscriminately (for instance, by handing out in the street) but it is also acceptable for the trader to be more selective.

This latter point was explained by Lord Simon of Glaisdale at page 411 of Fleming v Associated Newspapers Ltd [1972] 48 TC 382 as follows:

‘ … certain traders advertise by means of gift of their own goods, generally (though not invariably) to selected persons prominently in the eye of that section of the public which might be interested in buying the goods in question. It would be unjust if this particular sort of advertisement were disallowed as a deductible expense… when other types of advertisement were allowed. So the draftsman added to [what is now S1299(2) CTA 2009] the words “or, with the object of advertising to the public generally, gratuitously.”’

Where the trader limits the provision of free goods and services to particular individuals the condition is still satisfied if those individuals have a role to play in promoting the product. Examples of this are:

  • free meals given to restaurant critics, or
  • a couturier giving a dress to someone who is in the public eye

Similarly, a ‘trial run’ of hotel facilities provided to a potential bulk buyer of the product (such as a package holiday company) is accepted as being within the exemption. However, it is necessary to distinguish between a one-off trial of a service (with a view to future purchase) and repeated hospitality.