Thinking about buying food for your business? The simple act of buying food in your business can be technically challenging when it comes to getting a tax deduction from HMRC.
You may well think: ‘I’m buying a business meal therefore it should tax deductible’. However, there are several categories (or buckets as we like to refer to them) that your purchase could go into. Putting it in the wrong bucket could cost you a tax deduction, or cause you a penalty during a HMRC inspection.
Here are the three main food buckets:
- EntertainmentIf you are out and about buying a meal or even a coffee for a prospect or supplier, this is classed as ‘entertainment’. It’s absolutely fine for your business to pay for this, but there is no tax deduction available.
- Subsistence (travel related)If you are travelling for work, buying lunch or dinner it is often an allowable tax deduction, but it comes with various rules (surprise surprise!). Taking the simplest scenario of you travelling and staying overnight to visit a customer some distance away, your lunch and dinner that day would usually be claimable.
- ‘Staff’ or Team foodThis is the easiest one to trip up on. If you have a team (that includes yourself in the case of a limited company!), you are allowed to buy meals and food for your team, but you have to consider the tax consequences for them.
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- Let me entertain you Staff entertainment is generally tax deductible,. However, each employee is only allowed a maximum tax free amount of being ‘entertained’ by the company in a tax year. It’s currently a rather Scrooge-like £150 per head, per tax year. Generally you’d use this amount for things like the work Xmas ‘Do’.
- Here’s the kicker. If you exceed this limit, the employee gets landed with a tax bill. You can agree to pay it on their behalf, but it is admin heavy, and adds extra work that your accounts team won’t thank you for either.
- Food glorious food If you are supplying food on the premises, you can often use a ‘canteen’ exemption to allow a deduction, and avoid a tax charge on the team member. As always, there are strict criteria to fulfil.
- Trivial benefits If neither of these exemptions fit, consider the trivial benefit rules. Depending on the value of the food, these rules may allow the expense to be tax free and deductible by the business.
None of the above buckets
The challenge is that you can end up in situations that do not fit any of these buckets.
For example, say you decide to take part of the office (a small team or department) out for a curry to celebrate a great quarter’s performance.
Which bucket should this go in?
- It isn’t ‘entertaining’ (no customers present)
- It isn’t ‘subsistence’ (we aren’t travelling to a temporary workplace)
- It can’t be ‘canteen’ (it’s not on the premises)
- It can’t be ‘an annual function’ (it’s not open to everyone in the business)
- It can’t be a ‘trivial benefit’ (it’s a reward for performance)
Therefore, it’s likely to be tax deductible for the business as staff entertainment, but taxable on the employee!
Getting your buckets in a row
You can avoid costly mistakes by:
- Categorising clearly the various expenses in your records.
- If supplying food to your team, be clear on what the tax result will be, and the best way of achieving the outcome you’d like!
- Capture all entertainment spending.a. In a limited company there is still a small tax benefit vs using your own funds.
b. In a sole trader or partnership business, it’s still good to know what you are spending here.
- When entertaining, keep a record of who was entertained and what was discussed (broadly), in case of an HMRC challenge.
Chewing the fat
As you can see, careful thought is often needed before making the purchase if you want to get a deduction and not cost you (or your team) extra tax.
Ask your accountant if you are unsure how to categorise (or bucket-ise) your expenses. If your accountant doesn’t seem to know their tax from their tacos, contact us –we do!
About the author:
Dan Heelan is the Business Services Director of Heelan Associates, an accounting firm that helps small business owners across the UK start, survive, and grow.
With a background as a small business owner himself, he discovered his passion for accounting and tax early in his journey and now focuses on empowering fellow entrepreneurs with the knowledge and tools to navigate the financial side of running a business.
You can see and hear Dan in action in his regular: