BIM45061 - Specific deductions: entertainment: expenditure paid to specialist providers: mixed services

Problems may arise when payments are made for a number of services that may include entertaining. This often occurs when a business uses a specialist company for public relations or advertising.

Because the entertaining expenditure is within ICTA88/S577, it is not allowable. However, you need to consider whether the expenditure should be disallowed in the trader’s or specialist company’s return. The questions to address are:

• Who is doing the entertaining?
• Who controls the expenditure?
• Who finally incurs the expenditure?

Specific payment for entertaining

Where payment is made specifically for entertaining then the treatment is the same as with a specialist entertainment provider. The specialist company is acting as an agent for the client (who is then regarded as the ‘principal’) and all expenditure incurred is specifically reimbursed. In this case the expenditure is finally incurred by the trader and is disallowed under Section 577. The specialist is allowed to deduct the expenditure under ICTA88/S577 (10) - see BIM45030.

Where a separate invoice is raised for entertaining it is easy to identify the specific payment. However, the position is the same if the client makes a request for entertainment to be carried out on their behalf but the cost is included in a global invoice. You will then need to identify the proportion of the expenditure relating to entertainment. That proportion is disallowed under Section 577.

Payment of inclusive fee

The specialist may charge an inclusive fee for services provided without consulting the client as to the precise nature of those services. For instance, a trader might pay an agreed monthly sum to a public relations agency for all its publicity requirements but make no stipulation as to how those requirements are fulfilled.

If the trader has no direct control over whether entertaining is provided on its behalf then the payment made is too remote from the expenditure incurred to say that it is a specific payment for entertainment.

In this case the specialist is acting as principal, and not as agent, with respect to the expenditure incurred and the expenditure is disallowed under Section 577 in its own computations. ICTA88/S577 (10) does not apply to allow the expenditure in this event. This is because the exclusion only applies to services provided in the normal course of trade for payment. The expenditure is not specifically reimbursed by the client and no payment is received from the recipients of the hospitality. The hospitality is not provided for payment and so it is disallowable under Section 577 with no exemption available under Section 577 (10) - see BIM45030.