Yes, staff entertaining is normally tax deductible for UK companies and the VAT can be reclaimed. Client entertaining is not: it is disallowed for corporation tax and the VAT is blocked. The difference is who you are entertaining, and getting it wrong is one of the most common errors HMRC finds in small business accounts.
This guide explains how business entertaining and staff entertaining are treated in your accounts, for VAT and for corporation tax. It also covers the £150 Christmas party exemption.
Entertaining and tax: the quick answer
| Expense | Corporation tax deductible? | VAT reclaimable? |
|---|---|---|
| Staff Christmas party or team event | Yes | Yes (staff share) |
| Client or supplier entertaining (UK) | No | No |
| Entertaining overseas customers | No | Yes, if reasonable |
| Staff meals while travelling on business | Yes | Yes |
| Branded client gifts under £50 (not food or drink) | Yes | Yes |
| Directors-only meal | Likely to be challenged | No |
What is business entertaining?
Business entertaining is free hospitality for anyone who isn’t your employee. That includes clients, prospects, suppliers, shareholders who don’t work in the business, and former staff. Typical costs are restaurant meals, drinks, event tickets, corporate hospitality and hotel stays.
For corporation tax, client entertaining is specifically disallowed by section 1298 of the Corporation Tax Act 2009, however good the commercial reason. Your accountant adds it back to your profit, so a company paying the 25% main rate effectively pays £250 extra tax on every £1,000 spent.
If you take a client to lunch, your own staff member’s meal is caught too. HMRC treats the host’s costs as part of the client entertaining because you wouldn’t have paid for that lunch without the client there.
Is staff entertaining tax deductible?
Yes. Staff parties, team-building days and other events for your employees are an allowable expense for corporation tax, as long as they are for the business and not incidental to entertaining clients. Directors count as employees. HMRC also accepts that employees’ partners and retired staff attending a staff event are part of the staff entertaining for corporation tax.
Can I claim VAT on entertaining?
You can reclaim VAT on staff entertaining but not on UK client entertaining. The VAT rules mostly follow the tax rules, with three important differences:
- Partners and guests: VAT on employees’ partners and other guests at a staff party is blocked, so you can only reclaim the staff share.
- Directors only: HMRC does not allow VAT recovery on events for directors or business partners alone. Invite the wider team and the VAT becomes recoverable.
- Overseas customers: VAT on entertaining overseas customers can be reclaimed if it is reasonable in scale and for business purposes, although the cost is still disallowed for corporation tax.
Staff meals while travelling on business are subsistence, not entertaining, so the VAT is recoverable with a valid receipt.
The £150 Christmas party exemption
A staff party is a taxable benefit for your employees unless it meets HMRC’s annual events exemption. To qualify, the event must:
- be annual, such as a Christmas party or summer barbecue
- be open to all employees, or to all staff at one location
- cost no more than £150 per head in the tax year, including VAT, transport and any accommodation.
The £150 is a limit, not an allowance. Go even £1 over and the whole cost becomes taxable for the staff. You can usually settle that tax yourself through a PAYE Settlement Agreement, so your team doesn’t receive an unexpected bill.
How to record entertaining in your accounts
All entertaining is a business expense in your profit and loss account. Use separate nominal codes for staff entertaining, client entertaining and subsistence. Keep receipts, note who attended and why, and split mixed events by headcount. Good records make the year-end tax adjustment simple and protect you if HMRC asks questions.
Worked example: a staff Christmas party
A company spends £3,600 (£3,000 plus £600 VAT) on a party for 20 employees and their 10 partners.
- £150 test: £3,600 ÷ 30 people = £120 per head, so staff pay no tax.
- VAT: the staff share of £400 (20/30) is reclaimable. The £200 for partners is blocked.
- Corporation tax: the full £3,200 net cost (including the blocked VAT) is deductible.
Frequently asked questions
Is client entertaining allowable for corporation tax? No. Entertaining clients, suppliers or prospects is disallowed for corporation tax, and the VAT can’t be reclaimed unless the client is based overseas.
Can I claim VAT on a staff Christmas party? Yes, on the cost relating to employees and directors. VAT on guests such as partners must be excluded.
Can a one-person company claim a Christmas party? The £150 exemption can apply to a sole director, and HMRC accepts directors as employees for corporation tax. However, VAT on a directors-only event is not recoverable, and HMRC may question whether a meal for the director alone is a business expense at all.
Are gifts to clients tax deductible? Only if the gift carries your business’s advertisement, costs no more than £50 per person per year, and isn’t food, drink, tobacco or a voucher.
What happens if our party costs £160 per head? The whole £160 per head becomes a taxable benefit, not just the £10 excess. Most employers settle it through a PAYE Settlement Agreement. The company still gets the corporation tax deduction.
Need help with entertaining expenses?
The rules on entertaining are simple in principle but easy to get wrong in practice, especially for mixed events. [Contact us] for a review of how your entertaining costs are coded before your year-end, or ask us before you book your next event.
This article is general guidance for UK limited companies and isn’t tax advice for your circumstances. Sources: HMRC VAT Notice 700/65, HMRC BIM45033, GOV.UK: Social functions and parties. Last reviewed October 2026.
