Entertaining clients is part of doing business, especially in construction, engineering and tech where long projects and complex supply chains mean relationships matter. Taking a client to a site lunch, a box at the rugby or a thank-you dinner can feel like a fair cost of winning and keeping work. But here’s the bit that often jars with business owners: for direct tax, HMRC does not allow a deduction for client entertainment. In other words, the cost reduces your profit in commercial terms, but it won’t reduce your corporation tax or income tax bill. That’s why searches for entertaining clients tax-deductible keep spiking, and why we get so many questions about what is and isn’t allowed for 2025/26.
There’s a second layer too – VAT. Many teams assume that if they can’t deduct the cost for corporation tax, they can at least reclaim the VAT. In most client-facing scenarios, you can’t. VAT on business entertainment is specifically blocked, with a very narrow carve-out for certain overseas customers. That combination makes hospitality spend easy to mis-code and, if left unchecked, a drag on margin.
Context also matters. Costs are under pressure across the economy. The Office for National Statistics reported CPIH inflation of 4.1% in June 2025, which feeds through into restaurant and event prices (ONS, 2025).
Why HMRC says no to client entertainment
Business entertainment is defined as hospitality provided to people who are not employees – for example, customers, potential customers and suppliers. HMRC’s position is clear: expenditure on business entertainment is not an allowable deduction against profits, even where it is wholly and exclusively for the trade. The policy aim is to stop public funds subsidising hospitality. If you are a company, that means the cost is added back in your corporation tax computation; if you are a sole trader or partnership, it is disallowed in your accounts for income tax.
Keep in mind the difference between entertainment and subsistence. Subsistence is food and drink for you or your staff while travelling on business or working late – that can be allowable if it meets the usual rules. Once a non-employee is present and the purpose shifts to relationship-building, you are usually in entertainment territory.
When is entertaining clients tax-deductible?
For direct tax, almost never. Client entertainment remains disallowable for the 2025/26 tax year. There are edge cases – for example, if you run an event that is genuinely advertising or promotion aimed at the general public (say, a product launch open to all) the costs can be deductible as marketing. But if identified customers or prospects are entertained, expect disallowance.
For VAT, the door is also mostly closed, though there are narrow exceptions for overseas customers in limited, basic hospitality scenarios. If you think an exception might apply, get specific advice and keep tight evidence.
VAT: What you can and can’t reclaim
The default rule is simple: you cannot recover input tax on business entertainment of clients or potential clients. That includes meals, tickets, hospitality boxes and travel treated as part of the entertainment. Input tax on staff entertaining, however, is generally recoverable where it is for business purposes – think annual staff parties or staff-only team events – but not where the event is mainly for the benefit of directors or partners. Where an event mixes customers and employees, you may need to apportion costs between blocked client entertainment and recoverable staff entertaining. Good coding in your accounting system makes this painless.
Staff entertaining and the £150 per head rule
Staff entertaining is different from client entertaining. If you hold an annual event that is open to all employees and the total cost does not exceed £150 per head per tax year, it can be exempt from income tax and National Insurance reporting for employees. Go over £150 per head – even by £1 – and the whole amount becomes taxable. If you run more than one annual event, you can pick which events to exempt, provided the combined cost stays within £150 per head. Keep clear attendee lists and per-head calculations to prove the position if HMRC asks.
From a VAT perspective, input tax on staff entertaining is usually recoverable where the event is for business purposes and staff are the direct beneficiaries. If clients attend, apportionment is your friend.
Practical tips for construction, engineering and tech teams
Good processes protect margin and cashflow. We recommend:
- Expense policy basics: Write down what counts as client entertainment, staff entertaining and subsistence, with examples relevant to your projects.
- Coding in your accounting system: Create separate nominal codes for client entertainment: disallow for tax and block VAT; staff entertaining: allow for tax and reclaim VAT; subsistence: allow if eligible.
- Approvals: Set sensible per-head limits and require pre-approval for anything beyond routine meals.
- Evidence: Keep itemised VAT invoices, attendee lists and a short note of purpose – for example: Project A handover meeting: three employees, two client contacts.
- Mixed events: If staff and clients attend, split the invoice between staff entertainment and client entertainment based on headcount.
- Project costing: For construction and engineering, tag hospitality codes to jobs so you can see the full cost of winning and delivering work.
- Sponsorship with hospitality: Where a package includes marketing deliverables and tickets, allocate costs between advertising (deductible) and entertainment (disallowed) based on fair value, and keep the sponsor agreement.
If you need help tightening controls or VAT coding, our VAT team can set this up quickly and train your project managers.
Common grey areas we see
Site visit lunch: You take the client to a café after a morning on site. That is client entertainment – not deductible for corporation tax and VAT is blocked.
Internal team meal after a milestone: Staff-only, open to the team. Usually allowable for direct tax as staff entertaining and VAT recoverable. Watch the £150 per head limit across the whole year.
Trade show hospitality: If you pay for a stand and offer free refreshments to any visitor, that is more like advertising. If you host select prospects in a private lounge, that is entertainment. Document the set-up and split costs if needed.
Overseas customers: There is a narrow VAT exception for basic hospitality provided to overseas customers. If you think this applies, record who attended, their customer status and why the hospitality was necessary, then recover only the qualifying element.
Subsistence vs entertainment: A sandwich for your employee driving between sites is subsistence. Add a client to the table and it becomes entertainment.
Make better calls on hospitality spend
Entertainment has a place in building trust and keeping projects moving, but it should never surprise you at year-end. For 2025/26 the position is unchanged: client hospitality is disallowable for corporation and income tax and blocked for VAT in most cases. Treat it as a commercial cost, budget for it up front and record it cleanly. Use staff events to reward teams – within the £150 per head limit – and be methodical when splitting mixed-purpose costs. A short, clear policy and the right accounting codes will save time, avoid HMRC queries and protect your cashflow.
If you are unsure how the rules apply to your specific situation, we can review recent transactions, fix the coding and tidy up your VAT position. For larger teams, we can also refresh your expense policy and build project-level reports so you can see exactly what hospitality costs in the bids you win. Talk to us about corporate tax planning and VAT support, or, if you work in the built environment, our construction specialists can align your approach with CIS and reverse charge VAT.
Ready to put this on a proper footing? Get in touch and we’ll make entertaining clients tax-deductible decisions clearer, set up the right coding and reduce the risk of costly mistakes.