VAT rules for entertaining expenses
We’ve mentioned claiming business entertainment costs previously. In this blog we look at the VAT rules for entertaining expenses.
Normally, provided any goods or services you buy are directly linked to your business sales, you can reclaim any VAT on those costs.
However, the VAT rules for entertaining expenses stipulate that any VAT recovery is blocked - meaning you can't reclaim any VAT.
There are two exceptions to this rule:
- Staff entertainment
- Entertaining overseas customers
VAT rules for entertaining expenses: Staff Entertainment
You can claim a tax deduction for staff entertaining expenses and the tax rules also allow you to reclaim VAT on this type of expense.
However if the function is mainly for directors (and so excluding other staff where applicable) HMRC will strongly resist any claim for input VAT.
Additionally, if you're entertaining clients as well as your staff, you’ll need to disallow a proportion of the VAT suffered (based on the ratio of clients to staff).
Also if your staff are present simply to look after your clients then HMRC is likely to resist a claim in these circumstances.
If the event is mainly for marketing and the overall cost includes room hire and food etc, then cost will need to be apportioned to disallow any part related to entertaining ie food and drink.
VAT rules for entertaining expenses: Overseas Customers
An overseas customer is defined as any customer not ordinarily resident or carrying on a business in the UK. So it can also apply to customers in other EU member states.
You can reclaim VAT on the cost of entertaining an overseas customer of the business providing, in HMRC's words, it is "of a kind and on a scale which is reasonable".
HMRC’s view is that entertainment which isn’t of a reasonable nature has a secondary function of providing a personal perk to the recipient.
As providing a perk is a VATable supply, a business must charge output VAT on this value. This effectively cancels a proportion, or all, of the VAT that has been reclaimed.
HMRC will not permit a claim if the entertaining is part of a corporate event, such as a golf day, day at the races or trip to some other type of event.
In practical terms, it may be difficult to extend this concession beyond the provision of sandwiches (or maybe takeaway pizzas at a push) and soft drinks at a business meeting.
Entertaining overseas customers: Additional Points
You should be able to reclaim the VAT on the costs incurred for yourself (or your employees) if your attendance is essential to entertain overseas customers - for example, if you are hosting a business meeting which happens to be held at a restaurant.
Where entertaining foreign customers doesn't meet HMRC's definition of 'reasonable', rather than reclaim the VAT and have to account for it as a personal perk (see above) you can simply not claim it.
Finally, it’s worth mentioning that HMRC changed its policy in 2010 so it may be possible to reclaim back any input VAT suffered in the previous four years.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].