VAT incurred on goods or services used for business purposes can normally be recovered as input tax. However, tax on the provision of business entertainment cannot normally be recovered. Business entertainment covers customers and other business contacts, but not staff. Subject to certain restrictions, the recovery of VAT on the provision of staff entertainment is allowed. HMRC defines the term ‘entertainment’ as the provision of hospitality of any kind.
What is Business Entertainment?
For VAT purposes, entertainment can take many forms. Some examples given by HMRC of costs which are regarded as entertainment or the provision of hospitality include:
- the cost of providing food and drink;
- the cost of providing free accommodation (e.g., in hotels);
- the cost of theatre and concert tickets;
- taking clients to sporting events and facilities;
- taking clients to clubs, nightclubs, etc.; and
- using yachts and aircraft to entertain.
Overseas Customers
Input tax on business entertainment has always been restricted. The only exception had been where business entertainment was provided to an overseas customer. This exception was removed in 1988 but reinstated in 2010 following the ECJ decisions in Julius Fillibeck Sohne (C-258/95) and Danfoss and AstraZeneca (C-371/07). The term ‘overseas customer’ means any customer not ordinarily resident or carrying on a business in the UK, including the Isle of Man. A business cannot reclaim the VAT on entertaining overseas contacts who are not customers. The restriction on recovering input tax on business entertainment provided to anyone other than an overseas customer remains effective.
What VAT can be Claimed?
HMRC says that VAT incurred on the entertainment of overseas customers may be recoverable when incurred for the purpose of the business if it is ‘reasonable in scale and character’. Any entertainment provided in excess of this would be subject to a ‘private use’ charge. Hospitality provided because it would be polite, because it is expected, or because it would improve relationships is not for strict business purposes. If normal basic food and refreshments such as sandwiches and soft drinks are provided at a business’s premises during a meeting to enable the meeting to proceed without interruption, a private use charge will not apply.
If there is no other alternative than to hold a meeting outside the office, only similar basic provisions would be allowable. However, hospitality provided following a meeting would not meet the strict business purpose test, and neither would hospitality involving the provision of alcohol. Therefore, taking a customer to a restaurant is very likely to lead to a private use charge. This means that limited hospitality provided at a business meeting to discuss business-related matters with overseas customers is not a problem – but an output tax charge will apply if the gathering is not specifically linked to business (e.g., a day at the races, a trip to a show or an evening meal).
Private Use Charge
The ‘private use’ charge is an output tax charge that the business must charge itself that is equal to the input tax claimed. In effect, it cancels out any input tax claimed. Many businesses offer their customers or potential customers general entertainment and hospitality. Examples include:
- golf days;
- track days;
- trips to sporting events; and
- evening meals.
Where the related expenditure is incurred for the purpose of the business and recovered, an output tax charge will be due. This is because such events are unlikely to have a strict business purpose or are necessary for the business to make its supplies.
HMRC will allow businesses in this position to simply restrict the input tax claimed, i.e., where a ‘private use’ charge applies, the business can simply not reclaim the input tax incurred on the business entertainment to simplify the accounting procedures.
Practical Tip
If a business entertains overseas customers, input tax can be reclaimed, but only on very basic business-related subsistence costs. Anything more elaborate will trigger an output tax charge that will cancel out the claim.