TAX advisors are warning bosses that a clampdown by Customs & Excise could leave businesses with a corporate entertaining hangover unless they get their paperwork right.

Customs & Excise has written to a number of companies asking them to make a declaration that business entertaining expenditure has been correctly dealt with for VAT or that the company's knowledge of this area has improved in line with the guidance issued with the letter.

The clampdown focuses on businesses, ensuring they get their entertaining expenditure filed correctly on a business tax return. This is especially important in larger companies with heavy marketing spend and an active sales force. A failure to do so could be costly as penalties will apply.

However, tax investigations advisers at KPMG warn that there are complications. The definition of entertaining expenditure is not straightforward and has implications for corporation tax, income tax, PAYE, and national insurance as well as VAT.

The longstanding rule is that corporate client entertaining is not a deductible expense for tax purposes. The costs need to be identified when the company prepares its tax returns. It seems simple enough, but the complex tax rules mean it is practically impossible for business accounting systems to produce 100% accurate information.

Kevin Meehan, Tax Director with KPMG in Kent, gives an example of this complexity. He said: "A business conference will involve a wide range of expenditure--venue hire, organiser services, equipment hire, food, drink, accommodation for guests and employees etc. Each of these heads of expenditure may have a different tax treatment--but from an accounting perspective the whole lot may be correctly recorded as marketing.

"Even the most diligent companies with the most sophisticated systems find it almost impossible to get the tax absolutely right. Sometimes mistakes happen because people responsible for classifying expenditure do not understand the subtleties of the tax rules; often the IT systems are just not set up to capture the right information.

"The law requires companies to get their tax returns correct--and they have to sign a certificate to that effect.

“In order to get business entertaining absolutely correct all the time, some companies would need to spend far more than is consistent with the amount of tax at stake. What companies should be doing is carrying out an intelligently focused health-check of policies and procedures."

To avoid a Christmas entertaining hangover, businesses must consider the following issues:

1 When a client is entertained, check whether all costs associated with the event (eg: travel, tickets, hospitality) are being picked up.

2 Check whether staff entertaining is being separately identified and dealt with properly (eg is a tax deduction being claimed, but a taxable benefit declared)

3 Don't forget VAT. The VAT treatment generally follows the tax treatment, but often one is dealt with correctly but the other not.

4 Don't miss the opportunity to maximise the tax relief available. Sometimes companies end up disallowing too much because it is "too difficult" to get right.