Representation & deductions - all you need to know

Representation & deductions - all you need to know

A common expense item in a business is entertainment, but it is far from easy to know exactly how it should be accounted for and recorded. Without knowledge of the tax rules, the administrative work definitely becomes a challenge. In this article, we will tell you more about reporting representation in accounting(see the Accounting Act) and what the tax rules are. 

What do these expenses mean in everyday working life? How do you calculate tax on entertainment and which expenses are deductible? We provide the answers below.

What is representation?

A simple explanation is that the concept of representation refers to the expenses incurred in connection with specific aspects of the company's communication with external contacts. This could be food and restaurant visits, but also hotel accommodation or theater tickets. In addition, it can include staff-related expenses, such as the cost of the company's kick-off or a company party.

Whether you run a sole proprietorship, a limited liability company or a partnership, the conditions for making a deduction are the same: namely that entertainment expenses must be closely related to your day-to-day activities.

Overall, it can also be said that representation has a significant role for business. It aims to improve and build relationships both inside and outside the company walls. Being aware of the tax rules for business entertainment is therefore important to take advantage of the deduction in the right way.

Internal and external representation

There are two different names for entertainment expenses, internal and external. Internal representation refers to the costs incurred in connection with events within the company. Employees are involved and the expenses are directly related to internal activities.

Examples of internal representation:

• Staff parties
• Staff and board meetings
• General meetings

Instead, external representation includes costs incurred when the company's employees meet customers. It can also include meetings with a business partner that is important to the company.

Examples of external representation:

• Product presentation for customers
• Supplier meeting
• Meeting with company lawyer'

Rules and restrictions on entertainment

It is important to know the rules that apply in order to record representation correctly. It also benefits the business if both management and employees have good knowledge of how representation and deductions work in practice and theory. Representation is positive on several levels, it promotes the business while the company gets money back on the tax.

Requirements and documentation for representation

To substantiate the costs that the company reports in its accounts, the Swedish Tax Agency requires a valid supporting document. In this case, this is a note, invoice or receipt for the expenses incurred in connection with the entertainment.

The dossier shall contain the following information

1. Name and role in the company.
2. the date of the representation event
3. Name of the company providing the representation.
4. The purpose of the representation.

If the company submits a report of accounts with representation as an unsupported item, the tax authorities will not accept the deduction.

Hospitality and VAT exemption

Companies can deduct VAT and pay less tax on entertainment, but the costs must be a natural part of the business. This can make entertainment and deductions complicated, as the Swedish Tax Agency does not exempt all expenses from VAT. Since 2017, expenses for lunch, dinner or fancy dinners are not deductible. 

Tax rules for entertainment

However, business entertainment and tax are closely linked if it is a simple coffee break, so let's start with that example: if the company pays for a coffee and bun, a tax deduction can be made as long as the amount does not exceed SEK 60. However, a dinner is not a valid deduction for entertainment and related expenses. Here, however, it is possible to deduct VAT up to SEK 300, excluding VAT per person. The deduction of VAT should be based on the cost allocation between food and drink (alcohol).

To make accounting easier, many companies choose to calculate standardized deductions for meals. This means that the company can deduct SEK 46 per person if the total bill does not exceed the aforementioned SEK 300, excluding VAT. If the bill is more than SEK 300, the company cannot deduct VAT above that amount. You can easily calculate the standard tax on the Swedish Tax Agency's website.

Reporting of representation in accounting

If the company has invited a customer or business partner for coffee, the cost is fully deductible and it is therefore possible to book coffee as representation. If the total amount is SEK 150 with VAT included, the company can deduct the entire VAT. Since it is a twelve percent rate, the sum is then SEK 18. Here it is important to record VAT and costs in the correct account.

A more ambitious way to build good business relationships is to take someone to the theater or maybe play a round of golf. This type of external representation is tax deductible. However, the deduction is subject to a basis of SEK 180 excluding VAT per person.

Ethical guidelines for representation

Corporate hospitality is a natural part of many employees' working day. Therefore, it is important to have guidelines that explain how company employees should handle expenses for food, drinks and gifts. It is important for both employees and employers to approach these expenses in an ethical manner. All purchases should be based on good judgment with great respect for personal responsibility.

Some examples of areas where ethical judgment is important:

• Luxury purchases
• Alcohol intake

The tax authorities do not grant deductions for so-called luxury entertainment. This could be, for example, a specially arranged trip or lavish entertainment. If a company invites customers on a luxury cruise, there is very little chance that the tax authorities will approve a deduction for entertainment expenses for the trip. Companies should also exercise great moderation when it comes to alcohol in their entertainment. 

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Representation and marketing - what is the difference?

We have already discussed the complexity of reporting representation in accounting. But the concept can also be difficult to distinguish from other items within a business, such as marketing.

As a guideline, activities aimed at people not directly linked to the company are marketing. For example, the cost of having an information table in town is marketing. On the other hand, if the company pays for a coffee with an existing customer who visits the information table, it is representation of customers and also external representation.

Smooth management of company expenses

It can be difficult to know how to record entertainment expenses, but we hope you have a clearer picture of what it means and how it should be recorded in your business. However, remember to keep yourself updated on the rules as they are subject to change. 

To easily manage expenses in your company, the Mynts smart company card with integrated expense management is a good option. In addition, all receipts are saved digitally. Contact us today to find out more about our offer.