Entertainment expenses have always been an important part when considering business. The rules related to reclaiming VAT on client entertainment are quite flexible and constantly subject to change. These include the expenses incurred on meals, event tickets, and even aircraft or yachts used for the purpose of entertainment.
When speaking in general, according to the HMRC, input tax and VAT on client entertainment are non-refundable. The simplest given argument is that these expenses are not used solely or exclusively for business purposes. This makes it essential for businesses to consider entertainment costs in their budgeting carefully.
However, these laws are very complex, and VAT can be reclaimed only under certain specific circumstances. If you want to know more and learn how to handle these taxes, then you are at the right place. So, buckle up, as it isn't going to be a safe ride.
Before discussing Client Entertainment VAT, let us understand how client or business entertainment is understood according to the HMRC. According to The HMRC, any entertainment is considered business entertainment when all of the following conditions are met:
Since it is provided free of cost, VAT on Client entertainment in this case is non-refundable. However, as the saying goes, exceptions are always there; here, too, you will find exceptions. For example, business entertainment provided to overseas customers can be refundable.
VAT spent on the business entertainment provided to overseas customers is refundable provided it is reasonable in scale and character. But still, there can be an output tax charge to the individual if there is a private benefit to him. However, private use can be ignored if the expenditure becomes necessary strictly for business purposes.
The private use charge does not apply to basic foods and refreshments like sandwiches, soft drinks and other light meals. Taking the customer to a private restaurant would end up costing a private use charge.
When entertainment is provided on the office premises, then VAT can be reclaimed. If only basic refreshments are provided, like light snacks or cold drinks, then no private charge is applied.
However, if you are providing hospitality and taking your clients to some private restaurants, it is highly likely that you will be charged with some extra taxes, known as private use charges.
The entertainment provided to the staff or employees by the employer is wholly for the business purpose. Therefore, in this case, it is not blocked from recovery. It helps to reward the employees by maintaining and improving the staff morale. This general rule also comes with some exceptions.
Firstly, if the entertainment is provided to directors and partners, then no VAT would be reclaimable. Secondly, if the employees act as hosts to non-employees, then no VAT could also be reclaimed. This is because employee and director subsistence is not considered employee entertainment by the HMRC.
Who Is Considered An Employee?
Any person currently employed by the business, helpers, stewards, directors involved in management, business partners, and all other people who play an important role in managing the business are considered employees. However, former employees, job applicants or retired personnel are not considered employees.
A business partner or shareholder who does not manage the business as an employee is also not taken as an employee. According to the HMRC, VAT on the food and travel expenses of any employee working away from his usual place can be reclaimed. You may also be wondering if there is any charge vat on labour. Read our comprehensive guide about Do you charge VAT on labour?
VAT incurred in the entertainment provided to directors and business partners is not taken as input tax. As the services provided in this case are not specifically related to business, therefore, VAT can not be reclaimed. But If the directors and business partners are attending a party to which employees are also invited, in this case, the VAT can be claimed back.
When employees serve as hosts for non-employee entertainment, the HMRC considers VAT an input tax. However, business entertainment rules do not allow this VAT to be reclaimed.
As explained before, these rules and regulations are quite flexible and, therefore, constantly subjected to change. So, it is recommended to keep yourself updated by visiting the HMRC website. You can also hire an expert to assist you in handling VAT.
The situation becomes a little complex if your business is run only by directors and business partners and there are no other employees. According to the HMRC, the input tax incurred while providing entertainment to only directors and business partners does not qualify for reclaiming VAT.
However, VAT can be reclaimed on the expenses for travel, accommodations and meals provided to the directors working away from their usual work site. For instance, the business partners have to go for a business meeting or on a business trip; in this case, HMRC allows VAT to be reclaimed on the expenses. Also read about Claiming VAT On Mileage- How to Claim for Business Expenses.
Input tax applies to the services and goods utilized by a business for the sake of either entertainment or non-entertainment. In this scenario, where such services are utilized for entertainment alone, you can not reclaim any VAT on business entertainment.
However, the portion of input tax expended on non-entertainment business use is not blocked from VAT recovery. These rules are completely explained in VAT Notices 706 and 700. In this way, you can estimate how much VAT can be recovered depending on how the services and goods are used.
Sometimes, while inviting their employees, employers allow the staff to bring their friends and families along. In this case, VAT can only be recovered from the portion of input tax incurred in the entertainment of employees. VAT on the entertainment of other guests and non-employee personnel is blocked from Reclaiming. However, in the case of employees' spouses, all input taxes are reclaimable.
Therefore, a business manager and director must know how much VAT they can reclaim and what portion of input tax is blocked. It will help a lot in managing business assets spent on entertainment.
If you are someone worried that you might end up with so much VAT, then you should consider following some easy tips:
If you are choosing a venue that is not primarily used for entertainment purposes, then you might be able to reclaim VAT. As long as the main purpose of the entertainment is related to your business, VAT is not blocked from being reclaimed.
If you are choosing a time that is not associated with entertainment, then you might be able to reclaim VAT, as long as food and drinks are provided for subsistence and not for hospitality. Examples of time that you can use include breakfast meetings: a lunch seminar or a working dinner.
In refreshments, you can keep sandwiches and cold drinks, and VAT can be reclaimed on these, as per the rules and regulations of the HMRC.
If your guests are not only your clients, employees, suppliers or business partners, then you reclaim VAT. As the portions of input tax on the entertainment of your employees can be reclaimed.
Hence, by wisely choosing the right place, time, meal and your guests you save a lot of assets and even reclaim VAT on client entertainment.
Common Mistakes And Pitfalls To Avoid
When claiming staff and clients entertaining VAT, it is very important to avoid some basic mistakes. If you wisely deal with VAT regulations, you can save a lot of your assets, and as a result, your business can flourish better than ever. Here are some examples of mistakes that should be avoided:
Mixing Personal And Business Expenses
It would help if you tried not to mix personal and business expenses. Entertainment expenses that are also used for personal purposes, such as inviting your friends and family to join the event, can not be claimed back. Moreover, you should also not claim VAT on entertainment expenses not directly related to your business. Like the expenses used for your hobbies and leisure activities.
Exceeding The Reasonable Scale And Character
You should not claim VAT on client entertainment expenses that are too expensive, like expensive gifts or luxury travel. Moreover, the VAT cannot be reclaimed if your business consists only of directors and no employees.
By avoiding these common pitfalls, you can use VAT on client entertainment much better and to your advantage.
Do I Need To Hire An Expert For VAT On Entertaining
Whether or not you need to hire an expert for VAT On, Client Entertainment depends on several factors. If you are holding a mass-scale business with so many employees, then a proper understanding of VAT rules can save you a bunch of pennies. If you send many of your employees out for business trips, hiring a professional might also be beneficial.
Conclusion
Understanding the rules and regulations of HMRC related to VAT on client entertainment is crucial and very complex. VAT on staff entertainment is recoverable under usual circumstances. However, VAT on client entertainment is very complex. It depends upon how and where the entertainment is provided to your clients.
You are recommended to keep all accurate records of your entertainment expenses, as the HMRC may ask you to provide evidence for the VAT you want to claim. Many exceptions and rules govern VAT on Client entertainment, so it is beneficial to get professional advice if you are unsure whether VAT can be reclaimed. You can also visit the HMRC website to get a proper insight.
Rían Doyle
I'm a VAT professional with years of experience helping businesses with compliance and reporting. My goal is to simplify VAT calculation and provide valuable insights through my engaging writing style and clear explanations of complex concepts.
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