What business expenses are you legally allowed?

Lawyer Martin Cunningham looks at what businesses can spend on entertaining and expenses

Where is the dividing line between corporate largesse and unbridled avarice drawn?

Criminal defence solicitor Martin Cunningham, a fraud expert, explains what businesses can get away with when it comes to expenses.

Entertainment

The first base for any calculation about your legitimate business expenses is your own income and lifestyle. It is reasonable to expect that when you’re going about your company’s business you will avail yourself of services broadly similar to those you normally enjoy.

It follows that if you live in comparative luxury in the stockbroker belt your everyday needs will differ somewhat from someone who lives on state benefits on a caravan site.

One man’s lunch at the Ritz Grill is another’s Big Mac.

With this in mind, within reason, courts will usually conclude that you have not acted dishonestly when you expend the company’s money extravagantly in pursuit of a recognised business objective. Striving to win an important order or clinch a deal would merit the expense. Throwing a party for your wife and her friends, conversely, is unlikely to be seen as having a readily discernible business objective.

Property

Demonstrating you company’s success by managing it from extremely opulent surroundings has become an acceptable form of corporate extravagance. Again, within reason, courts will regard such decisions as beyond their scope, simply a matter for the board of the organisation concerned.

However, when a business acquires residential property in glamorous and fashionable parts of the world where it has no obvious business to conduct, this standpoint is likely to change.

A board of directors finding it necessary to acquire a luxurious residential retreat for their conferences which happens to be in close proximity to a celebrated golf course, racetrack, salmon stream of shooting estate may invite closer official scrutiny.

Remuneration, bonuses, incentives and gifts

As was the case with Hollinger Group, shareholders will eventually unseat those whose greed exceeds their abilities in the boardroom. When the principal shareholder also happens to run the business the machinations become complex, falling between the various stools of civil law, contract law, company law and tax law.

Perks

Again, there seems to be a sliding scale of acceptance that relates to a company’s size and stature. A small local plumbing business operating a racing stable, as a loss-making sideline for the directors’ enjoyment, is likely be viewed differently from a major multinational dabbling in bloodstock investments.

Most directors understand the legal implications of their company paying for a car or cars, gold cufflinks, Saville row suites, expensive entertainment and international travel. If they don’t, their accountants probably will.

Sector specific outlay

One can’t escape the conclusion that this bias extends to the sector of business you’re in, too. What is seen as normal promotional expenditure in, say, the film, television, fashion, advertising or sports entertainment sectors might be looked upon as wild extravagance in manufacturing, engineering or grocery retailing. It seems to have something to do with profitability and margins, too.

Heavy personal expenditure on corporate largesse by someone dealing in high value, high margin jewellery or works of art under the banner of an international brand may well be seen as acceptable. Expenditure of equivalent proportions by a company making machine tools may not.

When is it a bribe?

The final issue to consider is the point at which a demonstration of corporate gratitude or encouragement becomes bribery. A £250 lunch with a £200 bottle of 1st Cru Burgundy, plus £50 for a taxi to the airport, could be ‘business as usual’ for a theatrical agent discussing a $5 million film role for one of his West Coast clients. £500 in cash in a brown envelope handed to a materials buyer on a construction site negotiating the price of £5,000 worth of roof joists would be seen as blatant bribery.

Once again, it seems to depend on the sector, the circumstances, the size and proportionate value of the business under consideration, the income and lifestyle of the participants and the form the inducement takes.

You can contact Martin Cunningham by emailing martincunningham@martincunninghamsolicitor.co.uk

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