Specific issues: staff entertainment
The Input Tax Order does not apply to entertainment provided for:
- employees of the taxable person or,
- in the case of a corporate body, its directors.
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 for business purposes. Thus the VAT incurred on entertainment for the benefit of employees is input tax and it is not blocked under the business entertainment rules.
Between 1993 and 1997 we operated a policy of apportioning tax incurred on staff entertainment on the basis that the goods or services were used partly for private purposes. We usually allowed 50% recovery. We have accepted the decision in Ernst & Young (see VIT64300). Therefore, VAT incurred on entertainment for staff, for example:
- staff parties
- team building exercises
- staff outings and similar events
can be recovered in full.
Entertainment provided to directors and partners of a business
We do not generally accept the VAT incurred is input tax if entertainment is provided only for directors or partners of a business. This is because the goods or services are not used for a business purpose. The partners or directors do not need to reward or motivate themselves with entertainment. The tribunal considered this point in Ernst & Young (see VIT64300).
However, this does not apply to VAT incurred on subsistence type expenditure such as meals and accommodation taken by directors or partners when on a business trip. We also accept that where partners and directors attend staff parties there is normally no need for an apportionment.
Mixed employee and non-employee entertainment
Sometimes employers may entertain employees and non-employees, for example where the employer allows employees to bring guests to staff parties and outings without making a charge. When this happens the employer can only recover as input tax the VAT incurred on entertaining employees.
The proportion of entertainment provided to non-employees is blocked under the business entertainment provisions. If the non-employee is an overseas customer, the input tax is not blocked but output tax may be due (see VIT43200).
So if an event is held which is attended by roughly equal numbers of employees and guests only 50% of the input tax can be recovered. See KPMG Peat Marwick McLintock and also KPMG at VIT64300. We consider that the KPMG tribunal gave a well reasoned decision and fully supports our continued policy of apportionment.
The policy of not permitting apportionment of supplies covered by the Input Tax Order was overruled in the High Court. See Thorn EMI Plc and Plant Repair & Services (South Wales) Ltd at VIT64300.
Where the employee is acting as host for non-employees, the costs are incurred for the sole purpose of entertaining the non-employee. The tax is input tax but is blocked under the business entertainment rules. If the non-employee is an overseas customer, the input tax is not blocked but an output tax charge may be due (see VIT43200).