One of the most common strategies used by companies to maintain relations with other organisations and improve their image is to carry out activities to increase their visibility. These actions involve representation expenses and it is important to take them into account when managing the company’s budget. Below, we will explain what exactly representation expenses consist of, their characteristics and information to be taken into account.
Table of Contents
1. What are entertainment expenses?
Representation expenses are associated with the activities carried out by the company to improve and consolidate its corporate image, as well as its actions to strengthen links with suppliers and customers for commercial purposes.
These expenses are usually closely linked to the organisation’s public relations or sales and marketing actions. They are executed by the employees of these departments, and often also by the senior management of the organisation.
1.1 Differences between travel expenses and entertainment expenses
There is frequent confusion between travel expenses and entertainment expenses.
The main difference between these two concepts is that the former are intended to represent the company by organising a corporate action, whereas travel expenses derive from the employees’ work activity, such as subsistence, transport or accommodation of the employee during the working day.
The problem is that the same commercial or marketing action, for example, can include both types of expenses, and this is where the confusion arises.
For example: a company invites a foreign client to consolidate its business relationship and thus increase exports. The company has booked a hotel, will have dinner with the client at a well-known restaurant and, between meetings, the sales manager will accompany the client to a sporting event. All these expenses can be charged as entertainment expenses.
But what if, on the other hand, it is the sales manager who goes to visit the customer in his home country? In that case, transfers and accommodation should be counted as travel expenses, and only if the manager invites the customer to lunch can the invoice be counted as a representation expense.
The line is quite fine and sometimes causes reasonable doubt, but a trick to correctly separate the two expenses during the same business mission is to ask yourself this question: is this expense part of my business activity or is it for a third party?
Some examples of representation expenses that companies can count as such are the following:
- Business lunches and dinners with clients (actual or potential), suppliers, collaborators or partners.
- Transfers and hotel accommodation for these business partners.
- Businessgifts .
- Invitation to leisure activities such as sporting events, shows or wellness sessions.
- Registration for training sessions, among other training activities.
2. Corporate tax-deductible entertainment expenses
In the broad sense of the term, representation expenses can be infinite, as there is no limit to the imagination of marketing or sales managers when it comes to creating events to promote products or reinforce a brand.
However, for tax deduction purposes, the list is much shorter and therefore only those expenses specified by law are deductible. This is why you need to be careful to know when you are incurring such an expense and when it does not fall into this category for deduction purposes.
2.1 Types of deductible expenses
The three main types of representation expenses that companies can deduct from corporate income tax are as follows:
- Expenses to improve relations with clients or suppliers, such as gifts, invitations to restaurants, hotel accommodation, registrations for conferences and courses, the purchase of tickets for cultural or sporting events or even personal care services.
- Expenditure aimed at strengthening employees’ sense of belonging to the organisation in accordance with customs and practices. Typically this is the Christmas hamper, although other types of small gifts to employees on special occasions can also be included.
- Corporate expenses for the promotion of the company’s products or to reinforce brand positioning. This category also includes the company’s participation in activities aimed at reinforcing synergies in a given economic sector, in collaboration with other companies in the same field. For example, the creation of events, attendance at sectoral fairs or the organisation of conferences and seminars.
2.2 Non-deductible expenses
However, not all business expenses are deductible. In order to make a more precise distinction and avoid confusion, we see that the law governing corporate income tax mentions a number of non-deductible expenses:
- Losses caused by gambling.
- Fines and penal or administrativesanctions.
- Pension plans and funds.
- Expenses arising from actions against the law.
- Payments to services or persons resident in tax havens.
- Expenses arisingfrom the management of accounts, specifically those of corporate income tax.
- Donations or other unnecessary expenses to carry out the business activity.
- Remuneration of shareholders’ equity
- Business meals at private homes.
2.3 Limits on the deduction of representation expenses
Article 15 of Corporate Income Tax specifies that it is only possible to deduct a maximum of 1% of the net turnover in that tax period.
Inaddition, it should be remembered that expenses that are not intended to generate future business profits are not eligible for tax relief. Some examples of this are inviting people not related to the company to a restaurant for a meal or the purchase of tickets to events or shows for friends or family members.
3. Accounting for entertainment expenses
Within the chart of accounts, we can see that entertainment expenses are included in group 6, which comprises all expenses for the financial year, and within this, in subgroup 62, which refers to services of a diverse nature. Finally, we find account 627 , which includes advertising, publicity and public relations expenses.
4. How to recover VAT on entertainment expenses?
Within the tax framework, entertainment expenses have their own particularities. The basic requirements of the AEAT are as follows:
- The expenses must be linked to the economic activity carried out by the company.
- They must be properly justified and accompanied by the corresponding invoice.
- They must be recorded in the company’ s accounts.
For example, in the case of a meal with clients or suppliers, which is one of the most common representation expenses, the following data must be recorded:
- The reason for the expense.
- The number of participants.
- Name, date and type of event.
- Full invoice details: company, VAT number, company name, concept, taxable base and tax rate.
In short, in order to recover VAT on entertainment expenses, it is necessary to collect all the information that can explain the reason for the expenses incurred in a concrete and specific manner, thus being imputed in the corresponding accounting record and demonstrating that these expenses have a business purpose.
However, even with proper documentation, excessive expenses are often not accepted, as the regulations are particularly inflexible.
5. Management of entertainment expenses
Some companies use traditional Excel spreadsheets to manage business expenses, including entertainment expenses. This involves collecting invoices and receipts and manually entering the relevant data. These then have to be bank reconciled and entered into the company’s accounting system for processing, settlement and subsequent deduction of VAT. This is a time-consuming and costly process for companies and oftenleads to many data entry errors .
Automating the process of managing representation expenses will provide the company with a new and practical way of working and making savings. The company will have more control over the employee’s expenses, and will even be able to detect irregularities or cases of internal fraud. In addition, the company will have an overview of the representation expenses, drastically reducing additional administration costs.
For this reason, many companies opt for automated expense management through the use of technological tools designed specifically for this purpose.
6. Benefits of digitising the management of representation expenses
Solutions such as Tickelia are available on the market that manage the entire process of expense notes and business travel from start to finish: from advances to ERP accounting, responding to all of these needs.
Its implementation provides companies in any sector with a means of optimising the overall process of managing business expenses, while contributing to the company’s profitability. Tickelia reduces the time spent on this process by 75% and can be 100% integrated with ERP, CRM, payroll and human resources management software. It also allows you to set customisable alerts for greater control of payments according to the policy of each organisation and has an intelligent fraud detection process.
Another of the functionalities that makes this solution so practical is that to digitise the receipts you only need to take a photo of them from the app and that’s it, Tickelia takes care of managing the entire business flow such as approval, control of spending policies, management of advances and accounting with the ERP.
In addition, Tickelia is the only expense management solution that takes full responsibility for the VAT recovery process, both national and international, through a fee for success and with the highest recovery rate in the market.
