Guidance

Business entertainment (VAT Notice 700/65)

Find out how to account for VAT on entertainment provided by your business.

Detail

This notice cancels and replaces Notice 700/65 (November 2011). Details of any changes to the previous version can be found in paragraph 1.1.

1. Overview

1.1 Information in this notice

This notice has been rewritten to improve readability. The changes are made to ensure the technical content is up to date and relevant.

It explains the treatment of VAT you’re charged on business entertainment.

1.2 Business entertainment and VAT

You cannot recover input tax incurred on the provision of business entertainment expenses.

You can normally recover, as input tax, VAT incurred on goods or services used for a business purpose. However input tax incurred by you on the provision of business entertainment to UK business contacts and non-UK business contacts who are not customers is blocked from recovery under a special legal provision.

Business entertainment is not the same as employee entertainment which is explained in section 3.

2. Business entertainment

2.1 Definition of ‘business entertainment’

Entertainment is ‘business entertainment’ when all of the following conditions are met:

  • entertainment is provided - see paragraph 2.2
  • it’s provided to persons who are not employees of your business - see paragraphs 2.3 to 2.4 and 3.3
  • it’s provided free

Business entertainment provided to ‘overseas customers’ is not blocked - see paragraph 2.6.

2.2 Definition of ‘entertainment’

Entertainment is defined as hospitality of any kind, the following are examples:

  • 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

2.3 Employees that are included for the purpose of business entertainment

An employee includes:

  • a person employed by you
  • directors - or anyone engaged in the management of the business (including partners)
  • self employed persons (subsistence expenses only) - treated by you in the same way for subsistence purposes as an employee
  • helpers, stewards and other people essential to the running of sporting or similar events

2.4 Employees who are excluded for the purpose of business entertainment

The following are not employees:

  • pensioners and former employees
  • job applicants and interviewees
  • shareholders (who are not also employees)

2.5 Subsistence expenses for employees working away from their normal place of business

These are not covered by the business entertainment rules because they are not business entertainment. The relevant rules are explained in VAT guide (Notice 700).

2.6 Business entertainment provided to overseas customers

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.

Examples of the treatment of business entertainment

Meetings

If normal basic food and refreshments such as sandwiches and soft drinks are provided in your office during a meeting to enable the meeting to proceed without interruption, then 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. Hospitality provided following a meeting will not meet the strict business purpose test and neither will hospitality involving the provision of alcohol. Taking a customer to a restaurant is very likely to lead to a private use charge.

Corporate hospitality events

Many businesses offer their customers or potential customers general entertainment and hospitality. Examples include:

  • golf days
  • track days
  • trips to sporting events
  • evening meals
  • trips to nightclubs

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.

Further information about when a private use charge may apply can be found in Revenue & Customs Brief 44/10

If the entertainment provided triggers a private use charge the business can treat the VAT incurred as non-deductible rather than deducting the input tax and offsetting with an output tax charge.

2.7 Input tax on goods and services used by a business for entertainment and non-entertainment purposes

You are only blocked from recovering that element of your input tax that relates to business entertainment.

You can recover that portion of the input tax that relates to non-entertainment business use - subject to the rules on partial exemption, explained in VAT Notice 706: partial exemption. Guidance on how to apportion the tax can be found in VAT guide (Notice 700).

2.8 Exceptions from the business entertainment rules

The following table summarises exceptions from the business entertainment rules.

Who is affected Scenario Business entertainment position
Recognised sporting body. The ‘body’ provides through necessity free accommodation and meals to amateur sports persons and officials who attend an event. Recovery of input tax allowed. This is not business entertainment.
Airlines. The airlines provide catering and accommodation expenses for passengers who have been delayed. Recovery of input tax allowed. This is not business entertainment.

2.9 VAT treatment of disposal of goods bought and used wholly or partly for business entertainment purpose

The following table summarises your VAT treatment.

Use of goods Treatment of disposal
Wholly business entertainment use. Disposal of the goods is exempt.
Partly business entertainment use, partly other business use. VAT is due on the full selling price of the goods.

3. Employee entertainment

3.1 Overview of employee entertainment

Where an employer provides entertainment for the benefit of employees for example to reward them for good work or to maintain and improve staff morale, it does so wholly for business purposes.

Thus the VAT incurred on entertainment for employees for example staff parties, team building exercises, staff outings and similar events is input tax and is not blocked from recovery under the business entertainment rules.

However, there are two exceptions to the general rule. These are where:

  • entertainment is provided to directors, partners or sole proprietors of the business, see paragraph 3.2
  • employees act as hosts to non-employees, see paragraph 3.3

Employee and director’s subsistence is not employee entertainment. The VAT treatment of employee subsistence expenses is explained in VAT guide (Notice 700).

3.2 Recover VAT incurred on entertaining directors or partners of a business

If the entertainment is provided only for directors or partners of a business the VAT incurred is not input tax. This is because the goods or services are not used for a business purpose. The VAT cannot, therefore, be recovered.

But where directors and partners of the business attend staff parties together with other employees, we accept that the tax is input tax and is not blocked from recovery.

3.3 Recover the VAT on entertainment where your employee hosts to a non-employee

Where the costs are incurred for the sole purpose of entertaining a non-employee, the tax is input tax, but is blocked under the business entertainment rules, see paragraph 2.4.

3.4 Recover the VAT incurred on an event used to entertain employees and non-employees

You can only recover as input tax the VAT you incur on entertaining your employees. The portion of the input tax incurred in entertaining others is blocked under the business entertainment rules. Information on apportionment can be found in paragraph 2.7.

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Published 29 February 2012