With the hopeful relaxation of Covid-19 restrictions and the opening up of the economy, it seems likely that business people will soon be able to meet face to face rather than hiding behind a screen. The hopefully will lead to greater social interaction and the possibly for businesses to offer hospitality and business entertainment to customers and clients.
With this in mind, we thought it would be worth covering the key rules about VAT recovery of business entertainment expenses.
As is well known in the UK and other European countries (but not all!), any VAT incurred in the provision of business entertainment is blocked and cannot be recovered.
What exactly is ‘business entertainment’? At its most basic level, business entertainment refers to hospitality of any kind provided by a business to recipients normally in order to secure a business advantage such as encouraging sales, customer loyalty, customer goodwill etc.
Therefore, business entertainment covers a wide range of activities including the provision of food and drink, accommodation, event tickets and other facilities.
When Can VAT on Entertainment Costs be Recovered?
Entertainment provided to employees is not considered business entertainment. Therefore, any VAT incurred by a business for staff entertainment would be recoverable in full. This covers the cost of the traditional Christmas party and company awaydays as well as the provision of meals and refreshments to employees.For VAT recovery purposes employees also include directors or partners of the business. Also included would be employees of associated or group companies. Any helpers or stewards required to help run an event would also be treated as employees.The rules are quite strict and if entertainment or hospitality is provided to pensioners, alumni, job applicants or shareholders, VAT recovery would not be available, since they are not treated as employees.
- Employees and non-employees
If employees act as hosts for customers/clients, then the tax authorities view this as business entertainment and all VAT recovery is blocked.Where non-employees pay a reasonable amount towards their share of the costs of the entertainment or event, the event is no longer treated as business entertainment and VAT is recoverable. This may occur where a business holds a Christmas dinner and employees’ spouses/partners are invited and they contribute to the costs – this is no longer business entertainment and VAT on the event can be recovered.
- Overseas Customers
In contrast to UK customers, in some cases VAT recovery is available for entertaining overseas customers. Provided the entertainment is “reasonable”, any VAT incurred in entertaining overseas customers is recoverable. The key issue here is to determine what is reasonable. HMRC give the example of where a business meeting for overseas customers includes the provision of sandwiches and refreshments. If the meeting needs to be held outside the office, then only refreshments of a similar nature would be considered reasonable and the business would be able to recover VAT on the cost. Anything over and above this such as taking customers to a restaurant is likely to be considered business entertainment and VAT would not be recoverable.
- Apportionment of VAT
As a result of the complex nature of the rules it is possible that the VAT incurred for the cost of the same event may need to be apportioned. For example, if a business purchases 32 theatre tickets. 10 are used for clients, 10 for staff who host the clients and 12 tickets are provided to staff as a long service award. In such a case the VAT incurred in respect of the 12 tickets for long service staff can recovered which in this case would be 37.5% of the VAT. The remaining amount would be blocked as business entertainment. Apportionments in some cases can be complicated and in some cases it may be necessary to agree a methodology with the Tax Authorities.
- Recovery of VAT
In our experience, many accounts payable functions in ERP systems block all business entertainment. This can result in businesses losing out on valuable VAT recoveries. With some advance planning it is possible to structure accounts payable functions so that this VAT is not lost. Way 2 VAT has extensive experience in assisting businesses recover VAT on entertainment and similar costs.