When you’re a small business owner or self-employed, you know that you’re going to have many different tasks and responsibilities to deal with. That’s just how it goes! Not only do you have your job to do as a contractor, a small business owner or freelancer, you also have the running of the business to contend with. 
Rather than just providing a consultancy service or providing products, you need to know what’s going on behind the scenes with everything from customer service to finance. 
 
Business finances can be complicated when it’s just you running the show. You need to know the basics of small business accountancy and how to manage the incoming and outgoing transactions – or basic bookkeeping. You know that you need to keep a record of everything, so that much is clear. However, the challenges often lie in what you can and cannot record as an expense or legitimate business outgoing. 
 
A lot of people will find this area confusing – and with the ever-changing tax laws and legislation that’s no surprise! There are some expenses such as materials and equipment that you know you can record as a legitimate expense – but when it comes to subsistence meals and client entertaining, it’s not always as simple when it comes to knowing the rules. 
 
It’s easy make assumptions when it comes to expenses, but it’s incredibly risky to do so. It’s a grey area and because you want to be able to claim for a certain expense, you might just note it down. But it’s easy to misunderstand how this works. Essentially, there is a substantial difference between travelling for work and buying dinner for yourself (which HMRC classes as subsistence), and buying dinner for a client or entertaining them. Entertaining is not a tax-deductible expense. 

Factors that affect the claim 

Now, before we look at the key areas of expenses related to food, and particularly subsistence and entertaining, it’s important to understand these situations that can affect the ability to record a purchase as HMRC approved expenses. 
Everyday dining: here, we’re talking about eating your lunch at work, whether this is at home or your place of business. You’re eating to survive here. This is referred to as the dual-purpose rule, and HMRC does not accept this as an expense. 
Business only: for your expenses to be allowable, they must have been wholly and exclusively for the purpose of business or trade – not personal. 
Business travel: this is where the expense of subsistence is accepted. By travelling away from your usual place of business to work or execute your trade, it’s seen as allowable business travel and subsistence expense claims may stand. 
However, it’s important to note that your usual place of work refers to the place in which you spend all or more than 40% of your working time at, or, in the case of contractors, for at least 24 months. For more information about the 24-month rule, check out our blog post here

Claiming subsistence expenses 

If you’re a little confused by the term subsistence, this is essentially tax-language for ‘food and drink’. So let’s take a look at some key accountancy information you should keep in mind when looking to claim expenses in this area. 
Subsistence can only be claimed for in the case of business travel, as we covered above; 
Subsistence can also be claimed when making a visit to suppliers or clients, events and training courses, when deemed as allowable business travel. 
But note, the expenses need to be a reasonable amount, as HMRC is very strict on this and may class it as a personal choice rather than a business necessity. The current HMRC benchmark subsistence rates are as follows: 
£5 for qualifying travel of 5 hours or more 
£10 for qualifying travel of 10 hours or more 
£25 for qualifying travel of 15 hours or more where the travel continues after 8pm 
It is worth noting that it is possible to claim the actual cost of the meal or snack or, for ease, the subsistence rates above. If these rates are exceeded, tax/NIC is due on the excess, and you should always ensure you have adequate proof to demonstrate and prove that the journey is a qualifying business journey. 
 
For a more in-depth look at foreign travel expenses, check out our recent blog post here

Business entertainment 

As a general rule of thumb, client entertaining is not an allowable tax-deductible expense. You can note this in your accounts; however the sum cannot be offset for tax purposes. This means that although the business can pay for it, it is not deducted from the company profit before corporation tax is calculated. 
 
Therefore, if you meet with a client, potential client, or supplier, you are free to pay for the meal or other form of entertainment if you so wish, but you are unable to do so as a tax benefit. Although, if you are to meet with an associate, and you may for both meals, HMRC would view this as a personal decision and there are no grounds for business expense claims. 

Employee entertainment 

Another area that you may need to keep in mind is employee entertainment. This is somewhere between the two areas outlined above, but largely recognised in your small business or self-employed accountancy work as an expense. Let’s consider the following scenarios; 
 
HMRC allows employee entertainment in the form of eating with an employee on the payroll, over lunch, a working lunch, late into the evenings, or meets and appraisals, as a form of staff motivation. 
The ongoing subsidisation of meals for employees is not considered entertaining. Instead, it will be looked upon as a benefit in kind for tax purposes. 
 
When it comes to benefits in kind, it’s also important for you to understand when expenses will become taxable benefits of your employees, rather than subsistence. At the moment, HMRC allows up to £150 per employee to be spent on things like events such as your Christmas party or a summer BBQ. 
But this is the total cost – including things like accommodation and transport. However, this differs when you are a sole trader, as you are classed as the business and not an employee! 

Gifts that you give 

It may also be worth noting how tax works when it comes to thinks like gifts or Christmas presents. Somewhat a form of entertainment, when it comes to your accountancy, you can allow up to £50 for employee Christmas presents or gifts for occasions. For clients or suppliers, you may send cards but any gifts should be also under the value of £50 and mainly sent for promotional reasons. 

Key points to remember & next steps 

In summary, here are the key subsistence tax and expenses notes you need to remember; 
 
You are able to claim subsistence when travelling for work, if deemed acceptable by HMRC; 
Entertaining is not a tax-deductible expense and needs to be added back; 
Occasional and motivational employee entertaining is allowed. 
 
Make sure you are always up to date on the latest developments on legislation surrounding expenses by signing up to receive important updates here. If you need tailored advice about claiming back your expenses, or would like help with your bookkeeping, we would love to help. Why not book a call with us or drop us an email? We look forward to hearing from you! 
 
 
 
 
Written by: 
 
Nicola J Sorrell - 
Effective Accounting 
 
Founder | Xero Champion | IR35 Expert 
Tagged as: Contractor, Expenses, Travel
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