Are meals on the company ever tax deductible?
These days business lunches etc. are a common expense for most companies. The tax deductibility depends on who’s being fed and why. What are the rules and how can you work with them to maximise tax efficiency?
Meals are entertaining
As you probably know, tax rules don’t allow deductions for expenses in respect of entertaining. This covers the cost of any type of hospitality, including meals. Therefore, no tax relief is given if your company pays for taking a customer out for lunch, even if you spend the whole time discussing work. However, where a director or employee initially meets the cost of entertaining another rule comes into play.
No tax deduction regardless
If a director or employee pays for taking a customer or supplier out for a meal etc., HMRC applies special rules to ensure that the employer doesn’t obtain a tax deduction where it reimburses the director or employee. Alternatively, where reimbursement isn’t made the rule also means no tax relief is given to the director employee for the entertainment expense. The special rules say that where reimbursement is made:
- it counts as the employee’s earnings, but they are allowed a tax deduction equal to the reimbursement they receive. The two cancel each other out so that the position is tax neutral for the director or employee
- on the other hand if your company doesn’t reimburse the director or employee they can’t claim a tax deduction for the cost against their earnings.
These rules ensure that no tax relief is given for entertainment expenses.
Example. Bob and Ben attend a conference on behalf of their respective companies; they have lunch together and discuss business. Ben pays the bill and claims the cost back from his business. It isn’t entitled to a tax deduction for this even though it is an expense for the purpose of its accounts. If Ben hadn’t claimed reimbursement, he (rather than his company) would be refused a tax deduction to ensure that no tax relief is allowed for the cost of either his or Bob’s lunch.
Overall, the loss of tax relief for entertainment expenses is usually less if the director or employee reclaims the expense from their employer. However there might be an even more tax-efficient option.
While entertainment costs aren’t tax deductible, directors’ and employees’ subsistence costs are. So if, in our example, Bob and Ben pay for their own meals and are reimbursed by their employers, tax relief won’t be refused to them or their employers.
Where feasible, share the bill (ask the restaurant to issue two separate receipts). As long as the purpose for having the meal was subsistence (not entertaining) the cost is fully tax deductible.
On 6 April 2016 HMRC’s rules change so that the reimbursement of business expenses to a director or employee won’t count as their earnings. They’ll therefore no longer have to worry about claiming a tax deduction. However, the change won’t affect the tax position for employers; they will still not be entitled to a tax deduction for entertainment expenses.
If the purpose of a meal is just a jolly for a customer etc. it counts as entertainment and no tax deduction is allowed. However, if a meal is primarily for subsistence, but it happens to be taken with a business associate, it’s tax deductible. In that situation its advisable to split the bill to avoid questions from HMRC.