VAT on entertainment and subsistence

As a VAT registered business, you claim back the VAT on your purchases. But if you are claiming the VAT paid on entertainment and subsistence VAT recovery is blocked and things can be difficult.

HMRC has set clear rules in relation to what is and what is not claimable for entertainment and subsistence purposes, however, applying those rules correctly can be confusing.

The VAT rule for entertaining expenses is that you cannot claim back the VAT you have incurred. There are two exceptions to that rule:

• Staff entertainment and
• Entertaining overseas customers are allowable.

What do business owners think and why do they get it wrong?

If a business owner hosts a business meeting at a restaurant with a client and has incurred costs, the assumption is that the business can claim VAT on that. However, you cannot because wining and dining of clients is classed as ‘hospitality’ as opposed to ‘business entertainment and hospitality is something where you cannot claim the input VAT back on.

HMRC views client entertainment as hospitality as the owner is entertaining the client with the intention of bringing sales and profit. The profit eventually goes back to the owner. Hence, the rules say no to the input VAT claim.

VAT rules for staff entertainment

You can reclaim the VAT and a tax deduction on staff entertaining expenses. If you are entertaining clients and staff together if you have to disallow a proportion of the VAT suffered based on client and staff ratio. HMRC may not approve the claim if it is mainly for directors.  Some examples where you can make a VAT claim include:

• Team drink for your employee at month-end
• Staff day away as a part of a team-building exercise
• Annual office Christmas party
• The cost of lunch for employees while working on the client site.

VAT rules for entertaining overseas clients

An overseas client is any client that is not ordinarily resident or carrying business in the UK. You can reclaim VAT on the cost of entertaining providing it is “of a kind and on a scale which is reasonable”. HMRC classifies that entertainment expense that is not reasonable in nature is classified as a benefit/perk to the recipient. HMRC classifies perk as a Vatable supply which in effect cancels a proportion or all of the VAT that has been claimed. HMRC will also not allow entertaining as a part of corporate events such as sporting, music, days at the races, golf days, or trips to other types of events.

Talk to us about VAT

If you would like to know how we can help you with all of this, or anything else, feel free to contact us