You cannot usually reclaim input VAT on business entertainment however you can sometimes reclaim it for staff entertainment.
The notes below primarily come from VAT Notice 700/65 and VIT43200.
1) What is entertainment?
Entertainment involves hospitality of any kind, such as:
- provision of food and drink
- provision of accommodation (such as in hotels)
- provision of theatre and concert tickets
- entry to sporting events and facilities
- entry to clubs and nightclubs
- use of capital assets such as yachts and aircraft for the purpose of entertaining
2) Business entertainment
VAT incurred for the purposes of business entertainment is specifically blocked from recovery under the Value Added Tax (Input Tax) Order 1992 (SI 1992/3222), art. 5. Case law defines business entertainment as: the free provision of hospitality to persons who are not employees of the business, employees including directors of limited companies.
For example, hosting or taking clients to the entertainment below cannot be reclaimed for VAT:
- golf days
- track days
- trips to sporting events
- lunch/evening meals at a restaurant
- trips to nightclubs
Exception: Meetings
VAT can be reclaimed if basic food and refreshments such as sandwiches and soft drinks are provided at a meeting held in the office to help it continue without interruption.
However, the VAT cannot be reclaimed if a meeting is held at a restaurant and the meal is classed as lavish. If no office is available, HMRC could potentially argue that it could have been held at location such as a meeting room for hire or a coffee shop.
Potential Exception: Overseas customers
HMRC mention:
The term ‘overseas customer’ means any customer not ordinarily resident or carrying on a business in the UK, including the Isle of Man.
VAT incurred on the entertainment of overseas customers may be recoverable when incurred for the purpose of the business if it’s reasonable in scale and character. However, there will be an output tax charge if there is a ‘private benefit’ to the individual enjoying the entertainment which will cancel out any recoverable input tax.
There is usually a private benefit when business entertainment is provided. However, in cases where the expenditure is necessary and for strict business purposes the private use may be ignored. Hospitality provided because it would be polite, because it’s expected, or because it would improve relationships is not for strict business purposes.
The rules on overseas customers relate to the joined Danfoss/Astra Zeneca ECJ case and this involved basic working lunches provided to customers free of charge.
Our policy is not to reclaim VAT if the entertainment involves any overseas customers unless it involves basic refreshments which are not lavish. So restaurant meals cannot be reclaimed.
Rare exceptions: hospitality with obligations
To be non-recoverable expenditure, the hospitality must be free of charge or obligation. In the case of C & E Commrs v Kilroy Television Co Ltd [1997] BVC 422, the participants in the talk show were provided with a buffet meal. The court found that the company had put itself in a contractual position to provide the buffet, which was the only payment the participants received for taking part in the show. Therefore, there was no business entertainment provided. In a similar case, a market research company provided sandwiches at product trials where the public were invited to sample alcoholic beverages and complete questionnaires on them. HMRC accepted that the alcoholic beverages were not business entertainment but assessed the VAT recovered on the provision of food. The tribunal found that the food was a necessary part of supplying the drinks and was not business entertainment (DPA (Market Research) Ltd [1997] BVC 4,071).
3) Staff entertainment
Staff entertainment relates to providing employees with entertainment wholly for business purposes, such as to incentivise them and to foster team spirit.
The VAT can be reclaimed on staff entertainment, for example team meals/drinks, parties and other events.
Staff and employees do not include 3rd parties such as prospective employees, shareholders, former employees or pensioners, self-employed subcontractors, relatives or partners or friends of employees.
Travel & Subsistence
This is separate from entertainment if the primary purpose is not for entertaining. If an employee or director has to travel for business purposes then the input VAT of meals and accomodation can be reclaimed. HMRC generally use a five-mile radius from the office as an unofficial guide.
Entertaining involving only the Directors/partners
If no staff are included and the cost cannot be claimed as subsistence, then the VAT cannot be reclaimed. For example, the directors have a general lunch at a restaurant or attend a sporting event without any other staff.
If the directors work in separate locations far away from each other and decide to meet in person to discuss business matters then the VAT could potentially be reclaimed as subsistence.
4) What if entertainment is held for both staff and clients/customers?
Meals/subsistence
If staff/directors are working from their usual place of working (eg home or their office) and then they meet with a client some distance away specifically for that meeting, then the primary purpose would appear to be entertainment, so the VAT cannot be reclaimed for the staff/directors.
If the staff/directors are working away at a client site for the day or travelling, then they have to eat. So if a client were to join them for the meal and the entertainment is secondary to the primary business purpose of the meal, then the VAT for the staff/directors can be reclaimed.
Our general policy is not to reclaim VAT on UK restaurants unless we are specifically informed that it includes subsistence and the number of proportion of the meal being claimed, to confirm the non-staff VAT is reclaimed.
General entertaining
If the staff are not acting as hosts for the clients/customers, then the VAT can potentially be reclaimed for staff. However, this is such a grey area and difficult to prove, our policy is not to reclaim VAT if the entertainment involves any clients or customers unless we are specifically informed that the staff were not acting as hosts.
5) Why does MAH take a conservative approach to reclaiming VAT on entertainment?
Although we have dealt with a number of VAT investigations and enquiries and have a lot of experience in the kinds of things HMRC ask for, we don’t feel that its worthwhile trying to fight HMRC over entertainment as the rules about what is allowed or not are so grey.
When we look at the VAT court cases we find that event the Big 4 accounting firms KPMG and EY have lost cases against HMRC when they aggressively reclaimed VAT on entertaining.
