Food and Accommodation Expenses
When are they tax deductible?
Let’s look at food and accommodation expenses and when they are and are not tax deductible. Every year a client isn’t happy that we add back disallowed food or accommodation expenses. Adding back isn’t good for the client as it increases their tax bill. Coffees and lunches with clients that are for drumming up business is a common one. I’d notice a sense of shock with some clients wondering how they can’t get a deduction for meeting a prospect client. How would they have a business otherwise? Let’s look at
- The main rule
- Guiding principles
- Cases that make the rules
- Entertainment rules
- Summary
The main rule
The main rule is that for food and accommodation costs to be tax deductible, the cost must be wholly and exclusively for the purposes of the trade. This rule applies for a sole trader, partnership or company. The specific area of tax law sets out “non-deductible amounts”. It states that you cannot take a deduction for
- Any sum not wholly and exclusively laid out for the purposes of a trade or profession and
- Any sum expended for a private or domestic purpose
Usually, if there’s a private purpose, then the wholly and exclusively test doesn’t work and the expense isn’t deductible.
Guiding Principles
Revenue’s manual on this looks at some of the guiding principles to follow which come from case law. These are
- Look at the purpose of the expense (whether stated or subconscious) and not just its effects
- Humans eat to live, the don’t eat to work. As such, expenses incurred on food for a trade or profession will nearly always have a dual purpose. The person has the physical human need of eating
- Where additional expenditure is incurred on food because the taxpayer must eat away from home, that expenditure still has a dual purpose meaning it isn’t an allowable expense
- Hotel accommodation incurred on a business trip, where there is no personal motive in the trip, is an allowable deduction.
- Where a hotel bill for a business trip includes reasonable amounts for overnight accommodation and food, these two amounts shouldn’t be split out. If the accommodation is allowable, then so is the food.
- Where a person is on a business trip and the flights would be deductible, but it is more cost efficient to stay an extra night and return the following day, rather than return immediately, then, any incidental private element from that extra day doesn’t stop the cost of the flights being deductible.
Cases that make the rules
Edwards (Inspector of Taxes) v Warmsley Henshall & Co
An accountancy firm sent one of their partners to an international accounting conference in New York [I know the excitement]. At the conference the partner met other accountants and discussed evolving methods of accounting. The flight taken by the partner gave him the shortest time in the US but still resulted in him staying in the US for a few days after the conference ended. The Crown argued that the partner attended the US for both business and pleasure purposes, as he went sight-seeing while there.
On the basis that the partner wouldn’t have gone to New York, other than to attend the conference, although it has the subsidiary and accidental effect of also giving the partner a holiday in New York does not prevent the expense being allowable. As a result, the flights and hotel accommodation, while at the conference, was deductible.
Caillebotte (Inspector of Taxes) v Quinn [1975]
Mr Quinn, a carpenter, incurred an average of 10p a day for his lunch when at home [ a bag of Tayto!] while he incurred on average 40p a day when working away from home. Mr Quinn argued that there were two reasons for the extra expenditure on lunch
- Given the distance from home, it didn’t make sense to travel home for lunch every day and
- When carrying out such physical work it was necessary to eat a more substantial meal
He argued that the extra 30p was wholly and exclusively laid out for the purposes of his trade and as a result was tax deductible.
Not so, confirmed Justice Templeman. He confirmed that the taxpayer, like everyone else, must eat in order to live. “Taxpayers do not eat in order to work” The judge confirmed that there was no way to apportion an expenses like lunch between private and business purposes. Unlike the expenses of running a motor car which you can use for both business and personal mileage.
The same judge gave examples when the personal element of an expenses would be incidental, rather than a purpose of the expenditure.
“The cost of tea consumed by an actor at the Mad Hatter’s Tea Party is different, for in that case the quenching of a thirst is incidental to the playing of the part. The cost of protective clothing worn in the course of carrying on a trade will be deductible, because warmth and decency are incidental to the protection necessary to the carrying on of the trade.”
Mason v Tyson (Inspector of Taxes) [1980]
Mr Mason, a chartered surveyor, rented a flat over his office to use on nights he worked late. He claimed the cost of repairing and furnishing his flat. As a 70 year old he would be too tired to produce quality work after the long journey home, so when he needed to work late, he would sleep in the flat. He stayed in the flat 2 to 3 nights a fortnight. In the flat
- He did not carry out any work
- He did not receive any visitors and
- Did not use the flat for any other work purpose
One of his arguments was that he was only serving the interests of his clients. There would be no reason to spend a night alone in a 5-story building instead of at home with his family.
Walton J, in not allowing the expenditure by finding against Mr Mason noted
“But I do not think that anything which is laid out merely for the purpose of preserving the person who is carrying on the trade or business in health, strength and refreshment to enable him so to carry it on, can properly be said to be ‘wholly and exclusively laid out or expended for the purposes of the…profession’. It must in part, of necessity, be laid out and expended on ordinary human physical needs.”
Watkis (Inspector of Taxes) v Ashford Sparkes & Harward [1985]
The taxpayers who were partners in a law firm claimed a deduction for the following expenses
- Lunch provided during local meetings which were held weekly or fortnightly during lunch hour
- Dinner provided after evening meetings, during which the discussions of the evening meetings continued, and
- Overnight accommodation for the partners at the annual conference attended by the partners and their families; and
- Regional solicitors conference attended by some partners including dinner
In this case, the partners chose to meet over lunch for their convenience. The High Court contrasted this case with another case where the solicitors met their clients over lunch as the clients were only available at certain times. In that case, the lunch was incidental to the business meeting. Here, it was a completely separate expense.
Mallalieu v Drummond
The judge also referred to the Mallalieu v Drummond case
“Just as Miss Mallalieu needed to wear clothes not only when she was in court but also when she was not, so did the taxpayers need food and drink irrespective of whether they were engaged on a business activity or not.”
The expenses at 1 and 2 were disallowed in full because the purpose of the expenditure was not exclusively business.
The judge also concluded that reason for incurring the cost of the accommodation at the annual conference was an exclusively business one and that the private benefit to the taxpayers was incidental. He referred to the established practice of the Inland Revenue when looking at travelling occupations
“…not distinguish between the cost of travel and accommodation on the one hand and food and drink on the other. In other words, hotel bills, if reasonable in amount, are usually allowed in full. I have no reason to think that that practice does not correctly represent the law.”
Summary
To summaries this, where travel and accommodation expenses are incurred wholly and exclusively for the purposes of the trade or profession, any personal benefit in relation to the food and drink element of those expenses is incidental. Therefore the expenses are allowable in full. As a result, the expenses at 3 were allowable in full [Only the food and accommodation expenses of the partners were claimed. No claim was made for the wives and family members who attended the conference]
The cost of food and drink at the conference in 4 was incurred at times when the solicitors would normally have eaten. So for the same reasoning for the expenses as mentioned for points 1 and 2 above, there was not an exclusive business purpose, and the cost wasn’t deductible.
I don’t fully agree with the outcome of 4. For me, if I am attending a tax conference [I know mega excitement] then that’s exclusively for business. I am going because I want to learn the latest tax rules and practices, so our clients are up to date and we keep them in line with Revenue rules. I also have to complete annual continuous professional development which is a requirement of the Irish Taxation Institute. Just because I eat dinner at 7 o’clock in a hotel in Galway and I usually eat dinner at 7 o’clock in Waterford can’t make it a personal expense!
Commentary
So, what about meeting a client or a prospect for a coffee to drum up business? Surely, that’s a business expense! You would think so, but unfortunately that’s not the position Irish Revenue take. The law backs them up in their position as most business entertainment expenditure isn’t a tax-deductible expense. Business entertainment is defined as entertainment (including the provision of accommodation, food and drink or any other form of hospitality) provided directly or indirectly by
- Any person (including a company)
- Any person who is a member of such person’s staff
The section provides that in respect of expenses incurred in providing business entertainment no sum shall be
“deducted in computing the amount of the profits or gains or emoluments to be assessed…”
This tax and duty manual acts as a guide for Revenue reviewers and inspectors. It states that when a Revenue official is examining the accounts of a business, or an employee expense claim and
- A charge appears for business entertainment, or
- A charge for business entertainment is likely to be included in a charge for travel or other expenses, and
- There is no add back in the computation or explanation for lack of an add back. Appropriate action should be taken to establish the amount to be disallowed.
The strict rules of the entertainment category doesn’t apply to entertainment provided by a person for bona fide employees. Usually, for such entertainment to be allowable as a tax deduction, it must be available to all employees.
A final note is that some of the above is Revenue guidance. Plus, the guidance is based on old English case law. That’s not to say it isn’t relevant. The key Revenue message in all of this is to establish the basic principles. If the food and or travel is purely for business purposes and the private element in incidental, then it’s allowable. That doesn’t mean the coffee with the client is allowable. The business entertainment rules catch that one. Our job is to try and keep you out of Revenue crosshairs. If there’s an addback for entertainment in your tax computation, we are trying to protect you. You’ll pay a bit more but keep yourself out of trouble!
Keep you and your business on the right side of Revenue. If interested, start here
