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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Legal history: cases about entertainment

Please note that the following material is not a full summary of the case - it merely highlights the principle referred to in the appropriate section of this manual.

British Airways plc VTD 16446

British Airways gave vouchers to passengers whose flights had been delayed for more than two hours. The vouchers could be used to get food to a specified value at a number of restaurants in the airport. British Airways paid the restaurants for the value of food supplied to its delayed passengers.

The tribunal held that British Airways could recover input tax on the cost of the food. This was because:

  • The restaurants supplied the food to British Airways; and
  • British Airways made onward supplies of the food to the passengers.

The onward supply was held to be zero rated as part of the overall supply of transport.

British Car Auctions Ltd VTD 522

The company bought two racehorses. It tried to claim input tax on the grounds that the horses were used to advertise the business. The tribunal held that the horses had been bought so that the company could entertain customers at race meetings. Therefore, the purchase of the horses was for the purpose of business entertainment. As a result, input tax was not recoverable under what is now Input Tax Order, Article 5.

Danfoss A/S and Astra Zeneca 2009 STC 701

Two companies provided canteen meals to business contacts and staff at business meetings. The Court held that Article 6(2) of the EC Sixth Directive had to be interpreted so that:

  • it does not cover the provision of free meals in canteens to business contacts when meetings are held on company premises and when those meals are for strictly business related purposes;
  • it applies in principle to the provision of free meals to staff on a company’s own premises unless the needs of the business require the employer to ensure that meals are provided.

The Court said that giving employees sandwiches in meeting rooms could be treated as a supply for business purposes since, ‘the personal advantage which employees derive from such provision appears to be merely accessory to the requirements of the business.’

Ernst & Young VTD 15100

The partnership held a party and dinner dance for its employees. Each employee had to pay £10 towards the cost of the party and could bring a guest to the dinner dance at a cost of a further £15. On another occasion the partnership had held a conference for its partners. The conference included a cabaret.

The tribunal held that the partnership had incurred the costs of the party and dinner to reward its staff. The spending was therefore for a business purpose. Commenting on the charge made for guests, the tribunal said that “the crucial characteristic of entertainment within the phrase ‘business entertainment’ is that it is provided to people who enjoy it free of charge.” Although the £15 charge was much less than the cost of the party, the tribunal said, “it was not so small that one can say that the meal was effectively supplied free of charge.”

On the subject of the conference the tribunal held that the cabaret was “pure entertainment”. Therefore, the cost of the cabaret had not been incurred for the purpose of the partnership’s business.

Italian Republic 1997 STC 1062

The EC took proceedings against Italy for not implementing Article 13B(c) of the EC Sixth Directive. That Article exempts supplies of goods used wholly for an exempt activity when the goods have not given rise to the right to deduct input tax.

Italian VAT law treated the supplies as outside the scope of the tax. This did not always have the same effect as exempting the supplies. In cases where a business was partly exempt Italy’s rules resulted in the denominator of the fraction used in the partial exemption calculation being reduced.

The Court held that by enacting legislation which did not exempt from VAT supplies of goods used wholly for an exempted activity Italy had not fulfilled its obligations under Article 13B(c).

KPMG Peat Marwick McLintock VTD 10135

The partnership held a dinner dance for its staff, each of whom could bring a guest. The tribunal found that the attendance of the guests was incidental and ancillary to the attendance of the staff. Therefore the cost was not within the definition of business entertainment.

KPMG (No 2) VTD 14962

The partnership held dinner dances for its staff, each of whom could bring a guest. The tribunal upheld HMRC’s decision to allow 55% recovery on the costs of the dinner dance because the rest of the costs constituted business entertainment of the guests.

The decision in KPMG Peat Marwick McLintock was disapproved because in that case both parties had accepted that the tax could not be apportioned. However in the subsequent case of Thorn EMI plc the Court of Appeal had held that Article 5 of the Input Tax Order should be construed to allow apportionment when supplies are used partly for business entertainment and partly for other business purposes.

The tribunal held that the tribunal in KPMG Peat Marwick McLintock had made a mistake when drawing a distinction between the use of goods and services for business reasons and for social reasons. It had also been wrong to use a test of ‘predominance or paramount purpose’.

The tribunal held that there was nothing in the Input Tax Order “which stated or implied that the provision of entertainment for non-employees was to be treated as not being business entertainment where its provision was incidental to the provision of entertainment for employees, in contrast to the specific provision made in the converse case.” As a result, the business could only claim input tax attributable to the entertainment of its staff.

Paine Leisure Products Ltd VTD 1836

A company, whose main director had been a professional racing driver, manufactured and sold sunbeds. The director raced cars which bore the name of the company’s product. The company invited potential customers to the pits and entertained them there. The tribunal held that input tax could not be claimed on the costs of entertaining because this was business entertainment.

Plant Repair & Services (South Wales) Ltd 1994 STC 232

A company took a hospitality suite at a rugby ground. It used the suite as an office for two days a week. It invited customers to watch matches from the suite, and under the terms of the licence for the suite, also made use of some season tickets for the grandstand.

The Court upheld HMRC’s view that only one third of the input tax on the cost of the suite could be claimed because it was primarily occupied to provide business entertainment. It was held that Input Tax Order, Article 5 disallows input tax on any supply which is used to a measurable extent for business entertainment. Indeed the effect of the Article is that none of the tax was deductible (although HMRC had allowed recovery of one third of it).

PR Promotions VTD 2122

The partnership entertained prospective clients at a golf tournament. The tribunal held that the hospitality was within the definition of ‘business entertainment’.

Shaklee International & Another 1981 STC 776

Two corporations sold goods via a pyramid of agent distributors. They held regular courses for the distributors and provided food and accommodation. The Court held that the provision of free food and accommodation was within the definition of ‘entertainment’ so that input tax could not be claimed.

Thorn EMI plc 1995 STC 674

The company made electronic systems. It displayed and sold them at air shows, where it had exhibition stands and ‘hospitality chalets’. The company felt the chalets were needed for confidential discussions with potential buyers.

The Court held that the tax on the chalets should be apportioned. It held that Article 5 of the Input Tax Order should be construed to allow apportionment when supplies are used partly for business entertainment and partly for other business purposes. The Court decided that allowing no claim to input tax at all would go against Article 17 of the EC Sixth Directive.