Client entertaining or staff party? Separate the tax checks

In short: Client entertaining is generally not deductible for Corporation Tax, even with a genuine commercial reason, but qualifying staff entertaining can be (Corporation Tax Act 2009, section 1298). The separate £150-a-head exemption decides whether an annual staff party open to employees generally is a taxable benefit for them; it is not a limit on company deductions (Income Tax (Earnings and Pensions) Act 2003, section 264). HMRC's manual covers business entertainment and the staff-entertaining exception.

The practical mistake is asking one question, "Was this for work?", and treating the answer as permission for every tax claim.

Which tax questions does a company event raise?

Each event raises three separate questions: whether the cost is deductible for Corporation Tax, whether employees receive a taxable benefit, and what the VAT treatment is. A decision on one does not settle the others, so record the three conclusions in separate fields rather than answering "Was this for work?" once.

This article does not calculate VAT recovery or payroll liabilities.

For staff entertaining, HMRC still requires a business purpose. The exception does not simply cover employees attending a client event as hosts, where their entertainment is incidental to entertaining customers. HMRC: incidental employee entertainment.

What is the £150 staff party exemption?

The £150 exemption stops an annual function open to all employees, costing no more than £150 a head, from being a taxable employee benefit; it is not a client-entertaining allowance. HMRC adds further rules for multiple events and separate locations or departments (HMRC: exempt social functions).

The £150 figure is an exemption, not an allowance: where a function falls outside it, the taxable amount is not simply the excess over £150. The cost-per-head calculation includes VAT and relevant transport or accommodation. Ask the payroll preparer to check the full calculation and any other annual events. HMRC: annual functions.

How do entertaining costs change the Corporation Tax calculation?

Disallowable client hospitality is added back to accounting profit, while a deductible staff event needs no adjustment because it is already in the accounts expenses. In the illustration below, £600 of client hospitality is added back and a £900 staff event is left alone, so £35,000 of accounting profit becomes £35,600.

Assume a company has recorded £35,000 accounting profit after charging two events:

• £600 for ordinary client hospitality, confirmed as disallowable.
• £900 for a genuine staff event, confirmed as deductible.

Assume no VAT recovery and no other tax adjustments for this illustration.

The staff event is already in the accounts expenses. Deducting £900 again in the tax calculation would double-count it. The client cost remains in the accounts; the add-back changes the tax result, not the fact that the company spent the money.

This example does not establish that the staff event qualifies for the employee-benefit exemption. That remains a separate assessment.

What records should you keep for entertaining costs?

Keep the receipts plus evidence of the event's purpose and who attended, so the tax treatment can be traced later. A useful annotation says who attended and why, rather than simply "business meeting", and flags any event where clients and staff attended together for review. For each event, keep:

• The receipts or invoices for the event.
• A note of the event's business purpose.
• The invitation sent to guests or staff.
• An attendee list showing everyone who came.
• Each guest's relationship to the company, such as client or employee.
• A breakdown of any costs shared between groups.

For a mixed event, do not allocate the bill by headcount and assume that proves the tax treatment. The event's purpose and the role of those attending matter.

Agree consistent bookkeeping categories for client entertaining, staff events and unresolved costs. That makes the tax adjustment traceable without pretending the bookkeeping category makes the legal decision.

How do you file once the treatment is agreed?

Once the classification is agreed, the confirmed add-back belongs in the tax computation behind your CT600: ask Taxley how to enter the confirmed adjustment for your accounting period. Taxley can answer software questions; it is not offering an employment-tax or VAT opinion on the event.

To see whether self-filing suits your company more generally, take the 30-second check to see whether Taxley fits your company.

Frequently asked questions

Can a client meal become deductible because it won a contract?

No. A commercial result does not by itself remove the business-entertaining restriction: business entertaining is generally disallowed even where there is a genuine commercial reason for the event. The cost stays in the accounts and is added back in the tax computation (HMRC: business entertainment).

Should I leave disallowable costs out of the accounts?

No. Keep the company's actual expenditure recorded and deal with the tax adjustment explicitly in the computation. The add-back changes the tax result, not the fact that the company spent the money, and consistent bookkeeping categories keep the adjustment traceable.

Is a staff party deductible for Corporation Tax?

It can be. Qualifying staff entertaining can fall outside the business-entertaining disallowance, but HMRC still requires a business purpose. Whether employees receive a taxable benefit is a separate question, answered by the £150 annual-function exemption rather than the Corporation Tax rules (HMRC: staff-entertaining exception).

Does the £150 limit apply to client entertaining?

No. The £150 figure concerns whether an annual staff function is a taxable employee benefit; it is not a client-entertaining allowance or a universal limit on company deductions. Client hospitality is generally disallowed for Corporation Tax regardless (HMRC: exempt social functions).

What if a staff party costs more than £150 a head?

Then the function falls outside the exemption, and the taxable amount is not simply the excess over £150. The cost per head includes VAT and relevant transport or accommodation, so ask the payroll preparer to check the full calculation and any other annual events (HMRC: annual functions).

Do staff who host a client event count as staff entertaining?

Usually not. The staff-entertaining exception does not simply cover employees attending a client event as hosts, where their entertainment is incidental to entertaining customers, so treat their share with the client hospitality unless you've confirmed otherwise (HMRC: incidental employee entertainment).

General UK tax information. Obtain qualified advice on mixed events, employee benefits and VAT before filing.