ABC Consulting Ltd is a small consultancy firm based in the UK with a team of 10 employees. Like many businesses, they regularly meet with clients, contractors, and prospects, and often incur expenses on meals, travel, and hospitality.
However, confusion has been building internally — and even among external accountants — about how these expenses should be classified for tax purposes. Are they entertainment? Are they travel and subsistence? And does it matter who the expense is for?
The finance team at ABC is looking for clarity, particularly on five common scenarios they face.
The Core Issue
At the heart of the confusion is this: who is the expense for? Whether it’s for an employee, a client, or a contractor can completely change the tax treatment.
Understanding HMRC’s rules around corporation tax deductibility and VAT recovery is essential for getting it right — and staying onside with the taxman.
What HMRC Says
HMRC separates expenses into a few key categories:
- Business entertainment of clients: Not tax-deductible, and VAT is not recoverable.
- Employee entertainment (aka staff welfare): Usually allowable for Corporation Tax and VAT, if it’s reasonable.
- Travel & subsistence: Deductible when the expense is wholly, exclusively, and necessarily for business.
📚 Helpful HMRC references:
Business Income Manual: BIM45000, Employment Income Manual: EIM31815, VAT Notice 700/65
Let’s Break It Down – Common Scenarios
1. Client Dinners and Coffees
Example: Directors take a client out for dinner to talk business.
Tax Treatment: This counts as business entertainment.
Corporation Tax: ❌ Not deductible
VAT: ❌ Not recoverable
📝 Even if the meeting is 100% business-related, taking clients out is always considered entertainment by HMRC.
2. Employee Team Lunches
Example: A quarterly lunch with the whole team at a local restaurant.
Tax Treatment: Staff welfare/employee entertainment.
Corporation Tax: ✅ Deductible
VAT: ✅ Recoverable (as long as it’s not overly lavish)
⚠️ If lunches become very frequent or extravagant, HMRC may treat them as a taxable benefit for employees.
3. Travel and Accommodation for Employees
Example: Employees travel to Manchester for a business conference. The company pays for the train and hotel.
Tax Treatment: Business travel & subsistence.
Corporation Tax: ✅ Deductible
VAT: ✅ Recoverable
4. Meals During Business Travel
For Employees:
Classification: Subsistence
Corporation Tax: ✅ Deductible
VAT: ✅ Recoverable
For Contractors or Freelancers:
Classification: Entertainment (non-employee)
Corporation Tax: ❌ Not deductible
VAT: ❌ Not recoverable
📝 Even if the contractor is doing work for your company, HMRC sees them as a non-employee for this purpose.
5. Job Candidate or Interviewee Meals
Example: Taking a job candidate out for lunch during the interview process.
Tax Treatment: Entertainment of a non-employee.
Corporation Tax: ❌ Not deductible
VAT: ❌ Not recoverable
📌 HMRC treats job candidates the same as clients or other non-employees when it comes to entertainment.
✅ Know your audience: The tax treatment depends heavily on whether the expense is for an employee or someone else.
✅ Clarify the purpose: Is it necessary for the business, or is it hospitality?
✅ Keep records: Document who the expense was for and why — receipts alone aren’t always enough.
✅ Use HMRC guidance: Refer to the manuals to back up your expense treatment, especially in case of an audit.
Final Thoughts
By making a clear distinction between employees and non-employees, and aligning expense claims with HMRC’s rules, ABC Consulting Ltd can stay compliant and tax-efficient.
For accountants, this is a great example of how small classification details can have big tax implications. When in doubt, always ask: “Who is this expense really for?”