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HMRC internal manual

Business Income Manual

Specific deductions: entertainment: exceptions: entertainment of employees: meaning of incidental

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

Allowable, if not ‘incidental’ to entertainment of others

The exception to the normal disallowance for entertainment expenditure for staff entertaining does not apply if the entertainment of the member of staff is incidental to the entertainment of customers or of other people who are not employees.

Whether or not the entertaining is incidental depends upon the nature of the occasion. You should consider whether the employer would have paid for the event if there had been no guests present. If the employer would not have paid, then the event is business entertainment and the entertainment of the employee is incidental to this.

As an example, where a company provides its employees with free meals in its canteen, the cost is allowable as a cost of employment. If an employee has lunch with a customer in the canteen, the cost of the employee’s lunch continues to be allowable (the lunch would have been paid for even if the guest had not been present), although the customer’s lunch is business entertainment and so is not allowable.

In contrast, where the employee takes the customer out to lunch at a restaurant, the whole cost of the lunch for both the employee and the customer is business entertainment and is not allowable. This is because the company would not have paid for the lunch if the guest had not been present and so the employee’s lunch is incidental to that of the customer.

An employer may encourage employees to socialise with business contacts by, for instance, providing an employee with an annual subscription to a golf club. Although the intention of the payment is to encourage business entertainment, the expenditure incurred is on the provision of the benefit for the employee and you should not therefore treat it as incidental to entertainment of others. The expenditure is allowable to the employer but it must be shown as a benefit to the employee on form P11D.