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HMRC internal manual

Business Income Manual

Specific deductions: entertainment: expenditure paid to specialist providers: mixed services

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

Problems may arise when payments are made for a number of services that may include entertaining. This often occurs when a business uses a specialist company for public relations or advertising.

As the entertaining expenditure falls within the legislation, it is not allowable. However, you need to consider whether the expenditure should be disallowed in the trader’s or alternatively in the specialist company’s tax computations. The questions to address are:

  • who is doing the entertaining?
  • who controls the expenditure?
  • who finally incurs the expenditure?

Specific payment for entertaining

Where payment specifically for entertaining is made to a specialist company then the treatment is the same as if the trader had paid for the entertainment directly. The specialist company is acting as an agent for the client (who is then regarded as the ‘principal’) and all expenditure incurred is specifically reimbursed. In this case the expenditure is finally incurred by the trader and is disallowed in the trader’s tax computation under the legislation. The specialist is allowed to deduct the expenditure under the exemption in S46(2) ITTOIA 2005 for unincorporated businesses and S1299(2) CTA 2009 for companies. See BIM45060.

Where a separate invoice is raised for entertaining it is easy to identify the specific payment. However, the position is the same if the client makes a request for entertainment to be carried out on their behalf but the cost is included in a global invoice. You will then need to identify the proportion of the expenditure relating to entertainment. That proportion is disallowed under the legislation.

Payment of inclusive fee

The specialist may charge an inclusive fee for services provided without consulting the client as to the precise nature of those services. For instance, a trader might pay an agreed monthly sum to a public relations agency for all its publicity requirements but make no stipulation as to how those requirements are fulfilled.

If the trader has no direct control over whether entertaining is provided on its behalf then the payment made is too remote from the expenditure incurred to say that it is a specific payment for entertainment.

In this example, the specialist is acting as principal, and not as agent, with respect to the expenditure incurred. Therefore the exemptions in S46(2) ITTOIA 2005 and S1299(2) CTA 2009 do not apply to this expenditure and so it must be disallowed in the specialist’s own tax computations. This is because the exclusion only applies to services provided in the normal course of trade for payment. The expenditure is not specifically reimbursed by the client and no payment is received from the recipients of the hospitality. The hospitality is not provided for payment and so it is disallowable by the legislation.

See BIM45062 for an example.