Specific issues: business entertainment
VAT incurred on goods or services used for business purposes can normally be recovered as input tax. However, input tax on the provision of business entertainment cannot be recovered. This is the effect of the Value Added Tax (Input Tax) Order 1992.
Article 176 of Directive 2006/112 allows the UK to restrict input tax claims on business entertainment. We do this through:
- Section 84(4)(c) of the Value Added Tax Act 1994; and
- The Value Added Tax (Input Tax) Order Statutory Instrument 1992/3222 - (article 5).
For the purposes of the Input Tax Order business entertainment means the free provision of any hospitality to persons who are not employees (see VIT43600).
Input tax on entertaining overseas customers is not restricted under the Input Tax Order. However, if the input tax is recovered there may be other VAT implications (see VIT25000).
Meaning of “entertainment”
The term “entertainment” is described as the provision of hospitality of any kind. This definition comes from the case of Shaklee International and Another (see VIT64300).
For VAT purposes entertainment can take many forms. Here are some examples of costs which are regarded as entertainment or the provision of hospitality:
- the cost of giving away food and drink;
- the cost of giving away accommodation, for example in hotels;
- the cost of giving away theatre and concert tickets;
- giving free entry to sporting events and facilities;
- giving free entry to clubs, nightclubs etc;
- using yachts and aircraft to entertain.
The list is not exhaustive. However, it is intended to identify the main ways in which businesses provide entertainment.
A business might make a taxable charge for providing entertainment at significantly below cost. Where there is a taxable charge HMRC will look at each case on its own facts. See Ernst & Young at VIT64300.
Meaning of “employee”
An employee includes:
- a person currently employed by the business;
- directors or anyone engaged in the management of the business, including partners in a business;
- self employed people (subsistence expenses only) treated by the business in the same way for subsistence purposes as an employee;
- helpers, stewards and other people essential to the running of sporting or similar events;
- temporary or casual staff.
These people are not employees:
- former employees
- job applicants
- a shareholder who is not also an employee
- a partner, relative or friend of an employee.
The restriction on the recovery of input tax is not changed if some of the employees of the business are also entertained. None of the input tax can be claimed when employees act as hosts to non-employees and help entertain the non-employee.
However, if the employee is working away from their normal place of business and incurs subsistence expenses the input tax on their meal can be dealt with using the guidance in Notice 700 Section 12. Input tax cannot be claimed if the business trip is made solely for the purpose of business entertainment. Input tax can be claimed on the employee’s meal if the business entertainment is only secondary to the business carried out.
VAT treatment of disposal of goods bought and used wholly or partly for business entertainment purposes
- Goods used wholly for business entertainment:
The onward supply may be treated as being exempt. Please see Italian Republic at VIT64300 and refer to Group 14, Schedule 9, VAT Act 1994.
- Goods used partly for business entertainment and partly for other business use:
The onward supply is fully taxable. VAT is due on the full selling price of the goods.
Restriction of VAT claims
Input tax on business entertainment has always been restricted. The only exception had been where business entertainment was provided to an overseas customer. The term “overseas customer” means any customer not ordinarily resident or carrying on a business in the UK, including the Isle of Man.
In 1988 UK law was amended. The restriction was widened to cover all business entertainment, including that provided to overseas customers. This change aligned VAT law with changes introduced in relation to direct tax. The restriction was withdrawn in November 2010 following a review of the UK’s input tax restriction on business entertainment.
The European Court of Justice judgment in the joined cases of Danfoss and AstraZeneca (see VIT64300) prompted our review. We felt that the extension of the restriction to overseas customers was inconsistent with EU law. In November 2010 we invited claims for previously unrecovered input tax incurred on the cost of entertaining overseas business customers. See Revenue & Customs Brief 44/10 for more on this.
The restriction on recovering input tax on business entertainment provided to anyone other than an overseas customer remains effective. VAT cannot be claimed back on the cost of entertaining UK customers and non-UK business contacts who are not customers.
Providing entertainment is a part of business life. When reasonable in scale and character at least part of the VAT incurred would be deductible as input tax if the Input Tax Order was not there. This is because that VAT is incurred for the purpose of the business.
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. 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. See the business test at VIT10200.
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 is expected, or because it would improve relationships is not for strict business purposes.
Examples of the treatment of business entertainment to overseas customers
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 night clubs
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.
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.